1. Difference between
ROA and ROCE

2. Return on Assets (ROA) ROA = NOPAT/Average Assets
Most evaluations of profit performance begin with the return on assets (ROA) ratio.
ROA = NOPAT/Average Assets
ROA = / = = %14

3. Return on Assets (ROA)
1. A company’s sustainable operating profits are isolated by removing nonoperating or nonrecurring items from reported earnings.
2. After-tax interest expense is eliminated from the profit calculation so that operating profitability comparisons over time are not clouded by differences in financial structure.
3. Adjustments to eliminate distortions to both earnings & assets for items such as off-balance sheet operating leases.

4. A company can increase its ROA in two different ways:
1.By increasing the operating profit margin.
2.By increasing the intensity of asset utilization.

5. Return on Equity and Financial Leverage
A. Profitability and credit risk both influence the return that common shareholders earn on their investment in the company.

6. Return on Equity and Financial Leverage
B. Return on C/E (ROCE) =
NI available to Common Shareholders Avg. Common SE
This ratio measures a company’s performance in using capital provided by shareholders to generate earnings.

7. Return on Equity and Financial Leverage
C. Components of ROCE: ROCE = ROA common earnings leverage  financial structure leverage
ROCE = ROA  CEL  FSL
NOPAT X NI AVAIL. TO COMMON X AVG. ASSETS
AVG. ASSETS NOPAT AVG COMMON SE

8. Return on Equity and Financial Leverage
The common earnings leverage ratio shows the proportion of NOPAT that belongs to common shareholders.
The financial structure leverage ratio measures the degree to which the company uses common shareholders’ capital to finance assets.

9. LET’S SOLVE OUR PROBLEM
ROA = $ / $ = %14
ROCE = $ / $ = %13,8
CEL = $ / $ = 0,5196
FSL = $ / $ = 1,8933
ROCE = 0,1403 x 0,5196 x 1,8933 = 0,1380