There are stakeholders who have put in money or provided infrastructure for a company to operate and they expect some tangible gains from the company. Whatever they gain is basically return. That being said who are the stakeholders to a company?
- Equity holders (Both preferential and common stocks)
- Debt holders
There are 3 kinds of basic gains for each of the stakeholders
Equity holders get residual profits, Debt holders interest and Government Taxes.
Hence return on asset should consider total returns on the complete asset so return definition here is PBIT. While for Return on Equity it should just be the PAT. Returns are worked on accrual basis and never on expensed basis.
In any case, after all we are MBAs and we will democratize the process of finding the obvious as well and will not know but think it might be something or in the end say well then everything is right. After all the world was there before accounting standards came into being.