Why does return on assets use net income?
Given that assets can be funded by both equity and debt, but net income is post-capital structure, shouldn't return on assets use a pre-interest measure like EBITDA or NOPAT in its numerator? I couldn't find a good answer online, and ChatGPT was hallucinating, so I figured I'd ask here.
Creditors are not entitled to the return of the asset
Echo above. Creditors may be entitled to the asset itself as collateral, but their return is limited to interest payments. Operating assets generate cash flows which distribute back to equity investors after all int and amort. related expenses.
Thanks!
Yeah, but then ROA becomes entirely dependant on your financing structure and aptitude. I get what you're saying, but it also kind of goes against the spirit of what I think most people want to see with ROA.
I think this is a good question. Two companies with identical operations would look different based on their levels of debt by this measure
My only response is that I've only ever seen people care about this metric in the context of banks (since debt is more like an operating asset than a source of financing). I see return on equity more often, where it obviously makes sense to use net income
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