ok guys, this is a real simple one, but I would your help. To calculate ROA or ROE, I understand that we would always use Net Income/Average Asset and Net Income Attributable to Shareholders/Average Shareholders Equity respectively. However, someone argued with me that operating profit should be used instead, i.e. EBIT. I'm referring to financial firms and this is more of a credit analysis. Anyone could justify on which would be the 'preferred' one?

Question

anonymous · Answer

In case of ROE I believe Net Income must be used. Reason:  If you use EBIT, two firms with equal EBIT and Equity amount will have equal ROE, but the cost of Debt might be different so that is why use of Net Income will be much more informative. (sorry for my english). In case of ROA I would also use Net income. Otherwise equations like ROA=ROE *...../... will be incorrect.

anonymous · Answer

net income is the correct variable to use.