The Daily Technical #86: How would a share repurchase impact earnings per share (EPS)?

Good morning. Welcome to the 86th edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
What is the relationship between return on assets (ROA) and return on equity (ROE)?

The relationship between ROA and ROE is tied to the use of leverage. In the absence of debt in the capital structure, the two metrics would be equal.

But if the company were to add debt to its capital structure, its ROE would rise above its ROA due to increased cash, as total assets would rise while equity decreases.

Common Mistakes

1. Failing to mention how leverage impacts the relationship between ROA and ROE. Leverage increases ROE relative to ROA when debt is used.

2. Confusing ROA with ROE or using them interchangeably. ROA measures profitability relative to assets, while ROE focuses on equity.

TL;DR

• ROA and ROE are equal without debt

• Debt increases ROE above ROA by increasing assets and reducing equity

TODAY’S QUESTION
How would a share repurchase impact earnings per share (EPS)?

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