When roe is higher than roa?

Last Update: April 20, 2022

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Asked by: Ezekiel Sawayn DVM
Score: 4.1/5 (35 votes)

In the absence of debt, shareholder equity and the company's total assets will be equal. Logically, its ROE and ROA would also be the same. But if that company takes on financial leverage, its ROE would be higher than its ROA. By taking on debt, a company increases its assets thanks to the cash that comes in.

Should ROE be greater than ROA?

The ratio is, after all, a measure of asset productivity (which would in- clude both owner's equity and debt capital). This adding back in of interest produces an in- teresting result when comparing ROA to ROE. ROE should be greater than ROA.

What if ROE is too high?

The higher the ROE, the better. But a higher ROE does not necessarily mean better financial performance of the company. As shown above, in the DuPont formula, the higher ROE can be the result of high financial leverage, but too high financial leverage is dangerous for a company's solvency.

Will a company's ROE always be equal or exceed its ROA?

b. A company's return on equity will always equal or exceed its return on assets. True - The numerators of the two ratios are identical. ROA can exceed ROE only if assets are less than equity, which implies that liabilities would have to be negative.

Under what situation will return on equity be higher than return on investment when assets exceeds liabilities?

If a company has borrowed so much that its liabilities actually exceed its assets, then the company has negative equity. In that case, return on assets will indeed be larger than return on equity, because return on equity will be a negative number.


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