Question

Why would a company’s return on total assets be different from its return on common stockholders’ equity?

Short answer

The return is different due to the method of computation under both ratios.

Step-by-step solution

Explanation of Profitability Ratios

Profitability ratios are part of ratio analysis which measures the profitability of the business. It includes various ratios such as profit margin ratio, gross margin ratio, return on total assets, return on common stockholders’ equity, etc.

Explanation of return on total assets and return on common stockholders’ equity

Return on total assets and return on common stockholders’ equity both are part of profitability ratios. Return on total assets is estimated by dividing the net income by average total assets, however, return on common stockholders’ equity is estimated by dividing the difference between net income and preferred dividends by average common stockholders’ equity. This difference in computation results in a different return for both.