TMP 120 Lecture Notes - Lecture 12: Asset, Capital Structure
Document Summary
Return ratios & insights: return on assets = net income + interest expense (1-tax rate) Indicates how efficient management is at using its assets to generate earnings. Return on sales and high asset turnover: return on average assets = Average total assets: assets at beginning of the period + end of the period/2. Shows how efficient management is at using its assets to generate earnings. A lower roaa ratio reflects higher asset-intensity and vice versa. An asset-intensive firm needs more money to continue producing revenue. Roaa is more sensitive than roa as it catches changes in asset values during the period (taking on loans, paying them down, sudden operational losses), etc : return on common equity = net income. Measures the ability of a firm to generate profits from its shareholders investments in the company. Shows how much profit each dollar of common stockholders" equity generates: return on sales = net income.
