Return On Assets (ROA)
Return on assets (ROA) is a financial ratio that shows the percentage of profit that a company earns in relation to its overall resources (total assets). Return on assets is a key profitability ratio which measures the amount of profit made by a company per dollar of its assets. It shows the company's ability to generate profits before leverage, rather than by using leverage. Unlike other profitability ratios, such as return on equity (ROE), ROA measurements include all of a company's assets – including those which arise from liabilities to creditors as well as those which arise from contributions by investors. So, ROA gives an idea as to how efficiently management use company assets to generate profit, but is usually of less interest to shareholders than some other financial ratios such as ROE.
Return on assets gives an indication of the capital intensity of the company, which will depend on the industry. Capital-intensive industries (such as railroads and thermal power plant) will yield a low return on assets, since they must possess such valuable assets to do business. Shoestring operations (such as software companies and personal services firms) will have a high ROA: their required assets are minimal. The number will vary widely across different industries. Therefore, when using ROA as a comparative measure, it is best to compare it to a company's previous ROA figures or to the ROA of a similar company.
Calculation (ROA formula)
Return on assets is calculated by dividing a company's net income (usually annual income) by its total assets, and is displayed as a percentage. There are two acceptable ways to calculate return on assets: using total assets on the exact date or average total assets:
Instead of net income, comprehensive income can be used as the formula's numerator (see statement of comprehensive income).
ROA can be negative. If the net profit is negative, which means the company incurred a loss, and the ROA would also be negative, indicating that the company is not generating enough revenue to cover its assets. A negative ratio can be a red flag for investors and indicate that a company may not be efficiently using its assets to generate profits.
ROA Formula in ReadyRatios Analysis Software
ROA (net profit version) = F2[ProfitLoss]*(365/NUM_DAYS)/((F1[b][Assets] + F1[e][Assets])/2)
ROE (comprehensive income version) = F2[ComprehensiveIncome]*(365/NUM_DAYS)/((F1[b][Assets] + F1[e][Assets])/2)
F2 – Statement of comprehensive income (IFRS).
F1[b], F1[e] - Statement of financial position (at the [b]eginnig and at the [e]nd of the analizing period).
NUM_DAYS – Number of days in the the analizing period.
365 – Days in a year.
ROA Industry Benchmark
Average values for the ratio you can find in our industry benchmarking reference book – Return on assets.
Having a specific target value for ROA is not necessarily a good idea for a company's management. ROA is a useful metric for evaluating a company's profitability, but it should not be the sole focus of a company's management. The appropriate ROA value can vary greatly depending on the industry, the company's size, and its financial goals. Instead of focusing solely on achieving a specific ROA value, a company's management should strive for sustainable and profitable growth by considering a variety of financial metrics and factors. Additionally, short-term tactics aimed at boosting ROA, such as cutting costs or increasing prices, may not be in the best interest of the company in the long run.
ROA vs ROE
Return on Assets (ROA) and Return on Equity (ROE) are both important financial metrics that measure a company's profitability, but they differ in their focus and calculation. ROA measures a company's ability to generate profit from its assets, while ROE measures a company's ability to generate profit from its shareholder equity. This distinction results in a key difference between the two metrics: ROA provides insight into a company's overall efficiency in using its assets to generate profits, while ROE sheds light on a company's ability to generate profits using the money provided by its shareholders. In other words, ROA measures the profit generated per dollar of assets, while ROE measures the profit generated per dollar of shareholder equity. Both ROA and ROE are valuable metrics for investors and company management, but it's important to consider both to gain a complete understanding of a company's financial performance.
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Here I have found a free Excel template for Return on assets as part of