Question

Why do equity holders care more about ROE than about ROA?

Short answer

Equity holders care more about ROE than about ROA because ROA reflects how productively a bank is being run since it demonstrates how much benefit is created by every dollar of assets.

Step-by-step solution

Step 1:Concept Introduction

ROE-The return on equity is an essential instrument to calculate a bank's performance.

ROA-The term return on assets (ROA) alludes to a monetary proportion that shows how beneficial an organization is in relation to its complete assets.

Calculation of Equity Multiplier

Equity holders care more about Return on Equity $(ROE)$than Return on Assets $(ROA)$because of the connection between these two measures. Recall that localid="1648373444402" $ROE=ROA\times EM$and that investors are paid what banks deserve on their equity investment. EM is the equity multiplier, calculated as:

localid="1648373450298" $EM=\frac{\text{Assets}}{\text{Equity capital}}$

ROA and ROE

A bank can operate without a trap and have a high ROA, yet economic backers gain small returns since EM is down (when the denominator, equity capital, is high). Along these lines, equity holders should represent both ROA and EM to quantify profits from their speculations, which is ROE.

Final Answer

Equity holders care more about ROE than about ROA because ROA reflects how productively a bank is being run since it demonstrates how much benefit is created by every dollar of assets.