Reacting to companies with ROEs assistance

Investors most often cite the ROE ratio when they want to see how well a company is doing for them. This can be a huge mistake because ROE ignores the impact of debt on profitability, so it doesn't give investors the full picture of a company's financial position. ROE doesn't consider the impact of a company's debt position on its future earnings potential.

Comparing ROE to ROA for Mattel and Hasbro, you can see that both companies' ROEs look better than their ROAs:

Mattel Hasbro

The primary reason that ROE often looks better than ROA is that debt isn't included in ROE. When you see comparisons of company statistics, you frequently find an ROE but no mention of an ROA because many companies believe ROA is primarily a statistic to be used by management and the company's debtors. Take the extra time to determine the company's ROA, and compare it with that of other firms in the industry. You'll have a much better idea of how well the company generates its profit when you take both debt and equity into consideration.

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