10-04-2010, 09:01 PM
Dear Blue Sun,
Both formulas are right and used correct type of income, instead of asking correct formula you should ask the reason behind using 40,000 in one formula and 36,000 in the other.
In financial analysis, one can see the information in his/her own perspective based on the decision he / she wants to take on the basis of the available information. The information used for one decision may not be so relevant for another decision. You are confused that why different type of income was taken in two different formula and what was the reason behind?
Let me clarify in detail,
Definitions
Operating Expenses
A category of expenditure that a business incurs as a result of performing its normal business operations.
Non Operating Expense
An expense incurred by activities not relating to the core operations of the business. Accountants may remove non-operating expenses or revenues in order to examine the performance of the business, ignoring effects of financing or irrelevant issues.
So, normally, Return on Assets Employed is the ratio the management of the company is more concerned about this, they always wish to know that what is the actual earning of the company on the assets employed by them so they only take operating expenses and revenues for such ratio and ignore non operating.
While Return on Equity is the ratio to which an investor is more concerned, so for decision making, investor seeks for total earning of the company to the equity, regardless of nature being operating income or not.
Therefor, different type of income was taken in above formulas because one ratio is meant for management's prospective and other is for investor's prospective.
Hope you understand.
Both formulas are right and used correct type of income, instead of asking correct formula you should ask the reason behind using 40,000 in one formula and 36,000 in the other.
In financial analysis, one can see the information in his/her own perspective based on the decision he / she wants to take on the basis of the available information. The information used for one decision may not be so relevant for another decision. You are confused that why different type of income was taken in two different formula and what was the reason behind?
Let me clarify in detail,
Definitions
Operating Expenses
A category of expenditure that a business incurs as a result of performing its normal business operations.
Non Operating Expense
An expense incurred by activities not relating to the core operations of the business. Accountants may remove non-operating expenses or revenues in order to examine the performance of the business, ignoring effects of financing or irrelevant issues.
So, normally, Return on Assets Employed is the ratio the management of the company is more concerned about this, they always wish to know that what is the actual earning of the company on the assets employed by them so they only take operating expenses and revenues for such ratio and ignore non operating.
While Return on Equity is the ratio to which an investor is more concerned, so for decision making, investor seeks for total earning of the company to the equity, regardless of nature being operating income or not.
Therefor, different type of income was taken in above formulas because one ratio is meant for management's prospective and other is for investor's prospective.
Hope you understand.
