The difference and connection between return on total assets and return on net assets;

1. The difference in calculation formula: return on total assets = net profit average total assets (average total liabilities ten average owner's equity)100. The level of ROA directly reflects the company's competitive strength and development capabilities, and is also an important basis for deciding whether the company should operate with debt; rate of return = net profit * 2 / (net assets at the beginning of the year and net assets at the end of the year) 100. Return on equity reflects the level of return on shareholders' equity and is used to measure the efficiency of a company's use of its own capital.

2. The relationship between the calculation formula: Return on total assets = ROE The ratio of net assets to total assets = ROE (1-Asset liability ratio), which can be deduced further: ROE = Return on total assets 1/ (1-Asset-liability ratio) = Return on total assets equity multiplier. It can be seen from the formula that ROE is generally higher than ROA during the same period, and ROA=ROE only when debt = 0. At the same time, it can also be seen from the formula that under a certain ROA, the higher the debt ratio, the higher the ROE will be. This gives listed companies a revelation, that is, to increase ROE, they must relatively increase their debt ratio. But when ROA is greater than the borrowing interest rate, it is relatively reasonable to increase the debt ratio.

Duan Yongping said that return on equity (Roe) or return on equity (Roa) is helpful in understanding a company's business model, but it is not sufficient.

Ma Jinghao: This is true. By analyzing ROE and its DuPont decomposition, combined with ROA analysis, we can understand an enterprise's business model.

Free as the Wind 1966: Real estate and banks are suitable for ROA evaluation.

Ma Jinghao: Yes, the debt of these companies is very high. Relative to ROE, the distortion component is larger.

Compound tea house: Under a certain ROA, the higher the debt ratio, the higher the ROE. This gives listed companies a revelation, that is, to increase ROE, they must relatively increase their debt ratio. Especially when ROA is higher than the borrowing interest rate, the company may have the urge to borrow.

Ma Jinghao: As long as the impulse to borrow money is when the ROA is higher than the borrowing interest rate, this impulse is reasonable.

If you look at return on net assets and return on total assets together, dividing the two ratios is actually the "leverage ratio" of the company's profits. For example, a company has net assets of 1 million, liabilities of 1 million, and profit of 200,000. Then the return on equity is 20, the return on total assets is 10, and the leverage ratio is 20 10=2, which means the leverage is doubled.

Thus, ROE distorts the profitability of a business because of leverage.

It can be seen from the formula of "Return on Net Assets = Return on Total Assets Leverage Ratio" that ROE is generally higher than ROA during the same period, and ROA = ROE only when debt = 0. At the same time, it can also be seen from the formula that under a certain ROA, the higher the debt ratio, the higher the ROE. This gives listed companies inspiration that to increase ROE, the debt ratio must be relatively increased, especially when ROA is high When borrowing interest rates are high, companies may be tempted to borrow. However, companies with high leverage levels will earn more as a result, but the risks will also increase.

Clin V: Given the same profit, wouldn’t it mean that the higher the debt, the higher the profit margin on net assets, and the higher the debt, the better?

Ma Jinghao: The higher the debt, the better. If the return on equity is high because of a large amount of interest-bearing liabilities, such companies have hidden risks behind this indicator, at the expense of the stability of their business operations. Therefore, we should be wary of companies with large amounts of interest-bearing liabilities and high return on equity.

The level of return on total assets directly reflects the company's competitive strength and development capabilities, and is also an important basis for deciding whether the company should operate with debt. Generally, the return on total assets should be 5 or the one-year bank loan interest rate. When the return on total assets (before interest and taxes) is greater than the debt interest rate, the use of debt financing can bring about a positive financial leverage effect, and the company will earn more income; when the return on total assets (before interest and taxes) is less than the debt interest rate and greater than Zero hour means that the company can at least make greater profits by reducing debt.

Journey to the West: Doctor Hu: If the return on total assets continues to be lower than the risk-free interest rate, the company's continued operations will destroy its value.

Ma Jinghao: The cost of interest-bearing liabilities is usually at least 5. The cost of interest-free debt is 0. Therefore, when a company's return on total assets falls below 5, interest-bearing liabilities become a liability. A company with interest-free liabilities still has no burden when its return on total assets is 0-5. Among listed companies, most have a return on total assets below 5.

Return on total assets can be used as an indicator to analyze asset profitability, but it cannot be used as a management evaluation indicator. Let me give you an example: Suppose a company has net assets of 1 million and a bank loan of 1 million. After paying off bank loan interest and taxes, the net income is 200,000 yuan, the return on total assets is 10, and the return on net assets is 20. Assume that the company increases its loan from the bank by 2 million yuan, the company's net income can reach 300,000 yuan, the return on total assets decreases by 7.5, but the return on net assets rises to 30. Then, it is obvious that companies should increase loans, reduce return on total assets, and increase return on net assets. If the return on total assets is used as the management evaluation indicator, no manager is willing to increase loans.

It can be seen that the indicator for evaluating corporate efficiency can only be the return on net assets, while the return on total assets should rise or fall, so there is no need to worry. However, when using ROE to compare companies horizontally, you must pay attention to the company's debt ratio. If the ROE of some companies is obtained by high leverage, it will not be as good as those companies with stable financial structures and low debt when the ROE is roughly the same.

Du He, CPA: In the final analysis, return on net assets is the core formula of DuPont analysis, and its representative significance is irreplaceable.

I__bruce: Low debt means low equity multiplier, high return on equity means high profit margins and asset turnover, as well as strong profitability and operating capabilities.

Explain profound financial logic in concise language. If the article is approved by you, it means your encouragement. It is not easy to stick to originality for a long time, but there are many times when I want to give up. Persistence is a belief and concentration is an attitude. We will be with you all the way, forever and ever. Thank you. Related questions and answers: Return on net assets calculation formula Brief description of the return on net assets calculation formula 1. Return on net assets = net profit/net assets. 2. Among them, net profit = after-tax profit and profit distribution; net assets = owner’s equity and minority shareholders’ equity. 3. Of course, if no profit is distributed or there is no business merger, net profit = after-tax profit and net assets = all owner’s equity, then return on equity = after-tax profit/owner’s equity. 4. In DuPont analysis, the calculation of return on assets will be decomposed step by step to obtain some series of indicators, so other indicator formulas are used to calculate return on equity in turn.