Which ratio measures the overall return on the firm's assets inclusive of financial leverage and taxes?
A)ROA
B)ROE
C)Basic earning power
D)Profit margin

Question

Quizplus · Accepted Answer

ROA (Return on Assets) is the ratio that measures the overall return on the firm's assets inclusive of financial leverage and taxes. It is calculated by dividing the net income of the company by the total assets. This ratio helps investors and analysts to determine how efficiently a company is utilizing its assets to generate earnings. ROE (Return on Equity) measures the return on the company's equity capital, i.e., the return generated for shareholders. Basic earning power measures the earnings potential of the company's assets without considering the financial leverage, whereas profit margin measures the profitability of a firm's sales. Hence, ROA is the best choice to measure the overall return on the firm's assets inclusive of financial leverage and taxes.

Which Ratio Measures the Overall Return on the Firm's Assets