What is it? ROA (Return on Assets) is an indicator that evaluates the efficiency of using the company's assets. If the ratio of net profit to assets is high, then the business manages its resources correctly.
What to pay attention to? Assets are understood as everything that belongs to the company: equipment, real estate, transport, finance, securities. ROA is calculated for the selected period, the indicator is expressed as a percentage.
The article explains:
The essence and mom data package objectives of ROA
ROA calculation formula
The nuances of calculating ROA for different industries
Normal ROA
Pros and Cons of ROA
Difference between ROA and ROI
2 additional indicators to ROA
Automation of ROA calculation
Methods to Increase ROA
Problems with ROA Analysis
Frequently Asked Questions about ROA
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The essence and objectives of ROA
The ratio of real profit to the company's assets shows the return on assets ratio or Return on Assets (ROA). It helps you understand whether the organization is making money on its funds, property, real estate, etc.
The essence and objectives of ROA
Return on Assets also provides an assessment of the profitability of capital, both equity and borrowed. The concept of "organizational assets" covers everything that a company has, namely buildings and structures, transport, equipment and devices, finances, securities, inventories, etc. In other words, this is the property that can be represented in monetary terms.
The return on assets ratio shows the net profit that any of its assets brings to the organization. This financial indicator differs from the return on equity in that it takes into account not only the company's funds, but everything that the business has. For this reason, Return on Assets is not popular with investors and is a rarely used term.
The return on assets ratio demonstrates the ability of the organization's top management to make a profit from everything that is available. For example, a bus delivers employees to and from work, that is, it is used for one hour in the morning and the same amount of time in the evening, and the rest of the time it is idle. During this period, it can be put on a route or provide services on request.
As a rule, ROA shows the profit from invested capital. It is different in any company and directly depends on the area of activity. If this coefficient is used for comparative purposes, it is better to compare it with the same indicator of a similar organization. When there is no such company, the analogy is drawn with the indicators of previous periods.
Investors can use the return on assets ratio to understand how effectively an organization generates profit from its investments. Thus, the more a business earns from small investments, the higher the value of this indicator will be.
From an accounting perspective, total assets are the sum of the company's equity and all liabilities. These types of financing are intended to support the organization's operations. Since assets are maintained by equity or borrowed funds, some investors and analysts do not take into account the cost of their purchase, for which purpose inverse interest on expenses is introduced into the ROA formula. In other words, the impact of increasing debt obligations is minimized by adding the loan amount to net income and moving average current assets to the denominator. Interest expenses are summed up, since net income in reports does not include these costs.