Return on Assets

Return on assets (ROA) is defined as a measure comparing a company’s revenues with the value of its underlying assets. Return on assets is an indicator of how profitable a company is relative to its total assets. ROA helps in identifying how efficient a management is at using its assets to generate earnings. ROA gives an idea of what earnings were generated from invested capital (assets). ROA is calculated by dividing a company's annual earnings by its total assets, ROA is expressed as a percentage. It is sometimes referred to as "return on investment".

ROA varies according to companies. For public companies it can vary substantially and will be highly dependent on the industry. Hence when ROA is used as a comparative measure, it is best to compare it against a company's previous ROA numbers or the ROA of a similar company. The main aim of using return on assets ratio is that it is calculated as revenue over assets. Some use of the ratio simply to use the annual net income as the revenue figure, while others add on interest costs and then deduct interest tax savings. This leads to taking of the costs of some assets, such as the interest paid on cash which has been borrowed from the equation.

There are two purposes to calculate ROA. First ROA gives the potential investors an idea of how well a company performs with the assets it has. This means that a small company may do a better job using an investment than a larger company. The second purpose is that the company itself can analyze how well it is likely to use an investment. Therefore it means that if the company’s existing return on asset figure is considerably lower than the interest rate it would have to pay to borrow money, it may be that borrowing money would be inefficient until the company undergoes some fundamental changes.

Questions:

• What is return on assets?
• What are the purposes to calculate ROA?