Hi guys, I’m reviewing ch. 29 and for some reason, roa’s formula on pg. 62 is ebit/beg assets. I always thought it was ni/ avg assets I understand that sometimes it varies between beg and avg assets, but why is the numerator equal to EBIT? Any ideas?
ROA = NI/Average Assets. Anything else is not commonly understood to be ROA.
finally, something i can answer. If you have a FSA formula which has an income statement input and a balance sheet input, you should always use an average b/sheet input. eg Income Statement Item / AVERAGE balance sheet item.
@ canadiananalyst I was looking at the same discrepancy yesterday. In the FSA book the first page lists all ratios and mentions that these ratio definitions should be used by candidates whenever a ratio is calculated differently. So, I propose sticking to this list for the exam. As per the list: ROA = NI / Avg.Total Assets
But I still don’t understand why the book clearly says ROA= EBIT/ Beg. Assets! Wth is ebit doing there?
Well, although its NI/Average Assets, you could use EBIT/Beg Assets, Im not sure why though in what context was it used in the book, please dont give page number cos I really dont want to look
canadiananalyst Wrote: ------------------------------------------------------- > But I still don’t understand why the book clearly > says ROA= EBIT/ Beg. Assets! > > Wth is ebit doing there? CFAI states that, by and large, there are many definitions of ratios around. I suppose that EBIT / Beg.Assets is one of the alternative definitions of ROA. I would say do not bother. Stick to the ratios listed on the first page of FSA book.
Certainly the best thing is to know the formulas of first page.