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Table of Contents
- Understanding Return on Assets
- When to use our Return on Assets calculator:
- When not to use
- How to calculate Return on Assets?
- ROA formula
- Key takeaways from the ROA equation
- What is a good return on assets?
- The advantages of ROA metric
- Easy to use and understand
- A quick comparison of companies
- The disadvantages of ROA
- May be misleading
- Risk is not considered (volatility)
- Similar efficiency metrics
Understanding Return on Assets
ROA is a useful performance metric for analyzing a company's efficiency in utilizing its assets. In short, it's the ratio of a company's net income to its total assets. It is usually expressed as a percentage value. The higher the ROA, the better company uses its resources to generate profits.
When to use our Return on Assets calculator:
ROA is a very similar indicator to Return on Equity - the main difference is in how both indicators treat debt. While ROE leaves out the company's liabilities, ROA considers all debt. So for businesses that use debt extensively as leverage, Return on Assets is a better gauge than Return on Equity.
You can use the ROA calculator:
To determine profitability
Using the ROA indicator, you can quickly check how much income a company generates from its assets. Companies with negative Return on Assets generate losses.
To determine efficiency
Thanks to our calculator, you can quickly calculate how successful a particular company is in generating profits. A high return on assets clearly shows that the company is under good management.
To benchmark companies
The simplicity of this gauge allows you to quickly compare different companies. While doing so, you must remember to analyze companies in the same industry because companies from different market segments may have utterly other asset structures.
To compare periods
Return on Assets is the best method of analyzing how a company's efficiency changes over time. Since the structure of resources is similar, such a comparison can get precise information on whether the company is heading in the right direction.
To identify asset-intensive companies.
Low values of ROA are a clear sign that a particular company is either not utilizing resources at its disposal efficiently or is extensively using debt.
When not to use
Since ROA percentage value is highly dependent on the company's assets, it should not be used for comparing firms with different resource structures. For example, companies from various industries.
- Return on assets is a company's net income ratio to its total assets.
- Assets include stakeholders' equity and total debt.
- ROA is a clear indication of a company's efficiency in utilizing resources.
- Businesses from different markets should not be compared using this profitability ratio.
How to calculate Return on Assets?
ROA = (net_income / total_assets) * 100%
- Net_income - the company's net profit in the analyzed period from the income statement.
- Total Assets - available resources (including equity and debt) from the balance sheet.
There are cases where average assets are put into the formula. In such case, average assets are calculated as follows:
Average_assets = (Assets_at_the_end - Assets_at_the_beginign) / 2
Key takeaways from the ROA equation
- Return of Assets may take positive or negative values. Since the business may generate profit or loss.
- If a company has no debt, ROA is equal to ROE.
- For companies with debt, ROA is lower than ROE.
What is a good return on assets?
One may say that as high as possible, but in practice, even 5% of ROA is a reasonable return rate for companies that are using debt as leverage.
Much depends on the industry. Each industry characterizes its own cost structure; each has different competition. So many factors heavily impact possible returns on assets.
For example, a SaaS company may have a significantly higher ROA than a production company.
Since the second may need open credit lines to ensure cash flow, while the first has stable MRR from recurring customers.
For more information, you can check the average ROA by industry.
The advantages of ROA metric
Easy to use and understand
The simplicity of this financial ratio is one of the main reasons for the mass adoption of this indicator among financial analysts. A single percentage value given by the return on assets formula can provide many valuable pieces of information for an investor.
A quick comparison of companies
ROA is the best way to benchmark companies from the same market niche. As long as the companies have similar asset structures, ROA can be very precise in determining which one is more efficient and has higher perspectives for growth.
The disadvantages of ROA
May be misleading
Life would be easier if one single factor could replace a complete fundamental investment analysis. Although ROA is handy, it should be considered one of many metrics to check before making crucial business decisions.
Risk is not considered (volatility)
It's important to remember the ROA value is just a number, and a single number without proper context won't give you the correct answer.
The company's performance may vary, and so may the costs. It applies primarily to companies highly leveraged on debt. During good market conditions, it's relatively easy to handle debt. While during a downturn, liabilities can be a burden with a very negative impact on profits.
Similar efficiency metrics
If you wish to analyze the performance of your investments, you may use one of many calculators available here on Calcopolis. For example, our ROS calculator can help you analyze the performance of your sales.
The ROCE calculator lets you analyze how efficiently capital is utilized by the company.
The ROIC calculator is a handy tool for monitoring how well your capital is used by a particular company.
For general use cases, you many use a simple ROI Calculator.
Created by Lucas Krysiak on 2022-04-13 15:36:46 | Last review by Mike Kozminsky on 2022-09-15 13:48:38