medium · Financial Accounting financial-statement-analysis-ratios
Why is the standard Return on Assets (ROA) ratio considered biased for firms with significant debt in their capital structure?
- Assets are recorded at historical cost, while net income is in current dollars.
- The numerator (Net Income) is post-interest, while the denominator (Assets) is financed by both debt and equity.
- Total assets include non-operating items like cash.
- Depreciation is a non-cash expense that reduces the numerator.
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