Question
A company employing debt financing tends to show a higher ROE than ROA. Why is this...
A company employing debt financing tends to show a higher ROE than ROA. Why is this so and what does this mean?
Answers
Asset= Debt+ Equity
Return on equity= Net Income/ Equity
Return on Asset= Net Income/ Asset = Net Income/ (Debt + Equity)
We can contemplate from above that, if the company is employing more debt, then return will be high on equity because the impact of debt will be shown in ROA instead of ROE. This means the company has higher returns for Equity as compared to outsiders.
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