A return on assets (ROA) that takes into account profits available to all providers of financing (equity owners and creditors). More specifically, it adds back to net income tax-adjusted interest expense, as assets (the denominator) is financed by both equity and debt. This measure of profitability is given by:
Differently stated:
Where: EBILAT is earnings before interest, less adjusted taxes.
Suppose, for example, a company has reported $50,000, $450,000 and $30,000 in net income, assets and interest expense, respectively. If applicable corporate tax rate is 35%, then its preinterest ROA is:
Preinterest ROA= [50,000 + 30,000 (1-0.35)]/ 450,000 = 15.44%
This means every dollar of assets (financed by both equity and debt) produces a profit of 15.44 cents.
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