Question

The return on assets for Tresh Corporation is 7.6%.
During the same year Tresh’s return on common stockholders’ equity is 12.8%.What is the explanation for the difference in the two rates?
The return on assets for Tresh Corporation is 7.6%.
During the same year Tresh’s return on common stockholders’ equity is 12.8%.What is the explanation for the difference in the two rates?
@Finance

Answer 1

At first glance, these two Return on Common Stock & Return on Asset seem pretty similar. Both represents the company's ability to generate earnings from its investments. But they don't exactly represent the same thing. A closer look at these two ratios reveals some key differences. Together, however, they provide a clearer representation of a company's performance.

ROE
Of all the fundamental ratios that investors look at, one of the most important is return on equity. It's a basic test of how effectively a company's management uses investors' money - ROE shows whether management is growing the company's value at an acceptable rate. ROE is calculated as:
\[ROE = \frac{Net Income}{Stockholder's Equity}\]

You can find net income on the income statement, and shareholders' equity appears at the bottom of the company's balance sheet.

ROA
Now, let's turn to return on assets, which, offering a different take on management's effectiveness, reveals how much profit a company earns for every dollar of its assets. Assets include things like cash in the bank, accounts receivable, property, equipment, inventory and furniture. ROA is calculated like this:

\[ROA = \frac{Net Income}{Total Asset}\]

The Difference between ROA & ROE Is All About Liabilities :

Here in your question You've quoted Return on Equity as 12.8%
while Return on Asset as 7.6%.

From where the asset is purchased?

By taking on debt, a company increases its assets thanks to the cash that comes in.

And if the company will take financial leverage then Retun on Equity Would rise above Return on Asset. In this case the Stockholder's Equity would be represented by

\[Stockholder's Equity = Assets - Liabilities\]

But since equity equals assets minus total debt, a company decreases its equity by increasing debt. In other words, when debt increases, equity shrinks, and since equity is the ROE's denominator, ROE, in turn, gets a boost. At the same time, when a company takes on debt, the total assets - the denominator of ROA - increase. So, debt amplifies ROE in relation to ROA.

Answer 2

I would say the leverage impact

Answer 3

means cost of debt will obviously lower then ROA i.e.7.6% thereby shifting of return from debt holders to equity holders