Return on assets and return on equity can both be used to value a company. Contributor Simon Brown discusses how they differ and which one he prefers when determining how a stock is faring.
A reader contacted me recently asking about the difference between return on assets (RoA) and return on equity (RoE) as her broker offers both and they’re different values, with RoA being higher than RoE. She also wanted to know which was better to use when looking at a company. Typically, one uses RoE, but first let’s delve into what each one is before we decide which, if any, is better to use.
Return on assets
RoA is also sometimes called return on investments (RoI). To work it out, first we need to determine the assets of a company – this is easy as they can be found on the balance sheet. All assets will be listed along with the total value for them.
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