Return on Assets (ROA)

What is Return on Assets

Return on Assets (ROA) is a financial metric that measures the profitability of a company by looking at how much profit it earns in comparison to the total assets it owns. It is calculated by taking the company’s net income and dividing it by the total assets the company has. This metric helps investors and analysts assess how well a company is using its assets to generate profits.

Why Return on Assets is Important

Return on assets is an important financial metric for companies because it provides a clear indicator of how well the company is utilizing its assets to generate profits. It is a useful metric for investors and analysts because it can help them determine whether or not a company is making the most of its resources. Additionally, it can help indicate whether or not a company is making wise investments and can also be used to compare a company’s performance to that of its competitors.

How Return on Assets is Calculated

Return on assets is calculated by taking the company’s net income and dividing it by the total assets the company has. The formula for calculating return on assets is as follows:

Return on Assets = Net Income / Total Assets

For example, if a software company has a net income of $500,000 and total assets of $2,000,000, its return on assets would be 25%. 

ROA = 500,000/2,000,000= 25%

How to improve Return on Assets

There are several ways companies can improve their return on assets. Companies can reduce their costs by streamlining their operations, investing in new technology, and outsourcing certain tasks. Companies can also increase their revenues by expanding their customer base and offering new products or services. Additionally, companies can look for ways to increase the efficiency of their asset management, such as improving their inventory management or increasing the use of their assets.

Why investors value high Return on Assets

Investors value companies with high return on assets because these companies are typically more profitable and have better prospects for future growth. Companies with higher returns on assets are more likely to generate higher profits in the future and are considered more attractive investments. Additionally, high returns on assets indicate that the company is making wise investments and is efficiently utilizing its resources.

How Return on Assets relates to other financial metrics

Return on assets is closely related to other financial metrics, such as return on equity and return on investment. Return on equity is a measure of how much profit a company generates in comparison to the equity it has, while return on investment is a measure of how much profit a company generates in comparison to the investments it has made. Additionally, return on assets can be used to compare a company’s performance to that of its competitors.

Sources

• Investopedia. (2020). Return on Assets (ROA). Retrieved from https://www.investopedia.com/terms/r/returnonassets.asp 

• The Balance. (2020). Return on Assets (ROA) Definition. Retrieved from https://www.thebalance.com/return-on-assets-roa-357548 

• Investing Answers. (2020). Return on Assets (ROA). Retrieved from https://www.investinganswers.com/financial-dictionary/financial-statement-analysis/return-assets-roa-1283 

• Investing Answers. (2020). Return on Equity (ROE). Retrieved from https://www.investinganswers.com/financial-dictionary/financial-statement-analysis/return-equity-roe-1284 

• Investing Answers. (2020). Return on Investment (ROI). Retrieved from https://www.investinganswers.com/financial-dictionary/financial-statement-analysis/return-investment-roi-1285