I took a practice exam using an old (2007) Schweser test book (exam 1 morning question 28) where there was a question regarding the adjusted ROA and then the adjusted sustainable growth rate. In this example, ROA was calculated as EBIT / (avg total assets). My question is that I’ve seen ROA calculated using NI and EBIT. In this example, both NI and EBIT were avaiable but they used EBIT. Why wasn’t NI used here? Are there any guidelines here? Also, do you always use an avg. of a figure even though you are asked specifically for a particular year’s?
The average applies to the denominator, since it is a balance sheet value and the numerator spans the entire year. Not sure about the other stuff, or why you would use EBIT instead of NI.
post the question
Yea, did it say “pre-tax” or are you doing an International or cross-company comparison where they have different accounting methods? You would use EBIT, if you think there is some bias due to interest expense or tax difference; otherwise, the standard formula is N.I./(Avg Assets)
None of the references above apply. Nothing about pre-tax or any supposed bias. Would you mind providing an email where I can post question? It is very long and pdf is too big to post (all three pages). thanks
ROA is traditionally NI/Avg. Assets. EBIT would not be used except in special situations, and wouldn’t be ‘standard’ ROA.