ROA and RORAA
- Thread starter ajsa
- Start date
Hi asja,
Based only on Altman's internal definitions (i.e., riskfree is not adjusted, = 1.0), it would seem to follow (given same numerator) that RORAA > ROA.
However, in my opinion, this ratio section of Altman is *weak;* I personally wouldn't give great weight to these definitions. They are not (IMO) consistent with good/rigorous practices. ROA is not broady defined they way he has it; the numerator as a flow does not match the denominator, ROA should be something like RONA = (EBIT or net income + after tax interest) in the numerator, or ROGA = EBITDA in the numerator. It's technically wrong to use common equity flow against total assets because both of his metrics (ROA and RORAA) are easily distorted by leverage in the capital structure. His ROA can be boosted with a debt-for-equity swap)....if you have net income in numerator, as that's a flow to common equity, then only common equity should be in denominator (i.e. ROE)...David
append: sorry, I realize my criticism refers to nonfinancial corporations. Altman's ROA definition is more acceptable for financial institutions...i still think his ratio section is weak and imprecise
Based only on Altman's internal definitions (i.e., riskfree is not adjusted, = 1.0), it would seem to follow (given same numerator) that RORAA > ROA.
However, in my opinion, this ratio section of Altman is *weak;* I personally wouldn't give great weight to these definitions. They are not (IMO) consistent with good/rigorous practices. ROA is not broady defined they way he has it; the numerator as a flow does not match the denominator, ROA should be something like RONA = (EBIT or net income + after tax interest) in the numerator, or ROGA = EBITDA in the numerator. It's technically wrong to use common equity flow against total assets because both of his metrics (ROA and RORAA) are easily distorted by leverage in the capital structure. His ROA can be boosted with a debt-for-equity swap)....if you have net income in numerator, as that's a flow to common equity, then only common equity should be in denominator (i.e. ROE)...David
append: sorry, I realize my criticism refers to nonfinancial corporations. Altman's ROA definition is more acceptable for financial institutions...i still think his ratio section is weak and imprecise
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