Question 3.4: Because ROE and ROA are usually intended to measure performa...

Fundamentals of Corporate Finance

Because ROE and ROA are usually intended to measure performance over a prior period, it makes a certain amount of sense to base them on average equity and average assets, respectively. For Prufrock, how would you calculate these?

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We first need to calculate average assets and average equity:
Average assets = ($3,373 + 3,636)/2 = $3,505
Average equity = ($2,299 + 2,639)/2 = $2,469

With these averages, we can recalculate ROA and ROE as follows:

ROA = $\frac{\$435}{\$3,505}$ = .1240, or 12.40%
ROE = $\frac{\$435}{\$2,469}$ = .1760, or 17.60%

These are slightly higher than our previous calculations because assets and equity grew during the year, so the average values are below the ending values.

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