Return on Asset

Return on Asset (ROA)

The term “return on assets” (ROA) refers to a financial ratio that shows how lucrative a company is compared to its net capital. ROA can be used by shareholders, analysts, and corporate management to assess how well a company is using its resources to generate profit.

The ratio is often presented as a percentage considering a company’s revenue and average assets. When a company can manage its financial statements effectively, it will be indicated as a high ROA. On the other hand, a low ROA indicates a need for improvement.

What Are The Functions Of ROA?

When studying a company’s profitability, the ROA formula is an important ratio to consider. This ratio is often used when comparing two businesses in the same sector. These businesses must have a uniform structure too. It’s also used when measuring a company’s success over time. Also, it is important to consider the size of the company and the activities performed.

Typically, the ROAs of various industries vary. Industries with high working capital requirements often have lower ROA because the denominator of the calculation is higher than the extensive asset base of these industries. A firm with a huge asset base can have a high ROA. But that will only be if its revenues are high enough.

How ROA Works

The ROA ratio for any sector will rise and fall over time. It can also be used to assess the performance of a particular company. If the ROA value is falling, it may mean that a company is spending too much on its equipment and other assets. However, a rising ROA is a sign of increasing efficiency.

To determine how effectively the company is being run and how competitive it is, investors and management can evaluate the overall health of the company by looking at its ROA. Also, investors often look at ROA when assessing a company’s profit potential compared to others in the same industry. This will help them decide whether to invest in the company or not.

How To Calculate The ROA?

The formula for return on assets is calculated by dividing a company’s net income by the number of assets reported on the balance sheet. You can use this mathematical formula; return on assets = net income/total assets. When a  company can use its assets to generate profits consistently, it will have a high ROA  value.