Unlevering the return on assets When calculating a firms return on total assets (ROA) ratio, some investment professionals modify the ROA ratio by adding back the interest expense paid by a firm to its creditors, on a net-of-taxes basis, as follows:

Net income + i.(1-tax rate)] Return on assets = ---------------------------------------- Total assets

Where i is the actual interest expense paid by a firm and the tax rate is a firms effective tax rate (income tax expense divided by pre-tax net income). Adjusting net income for the interest expense paid by a firm is called unlevering net income because the adjustment yields a measure of net income as if the firm were all equity financed (with no debt financing).

Discuss when and why unlevering ROA might produce a more useful measure of the return on assets of a firm.