Return On Assets (ROA)

Return On Assets (ROA)

Retun On Assets (or ROA for short) is an indicator informing the user about how profitable a company is relative to its total assets. It tells the user how effective a business has been at putting its assets to work.

In other words, the ROA is a test of capital utilization, that is how much profit (before interest and income tax) a business earned on the total capital used to make that profit.

This ratio is most useful when compared with the interest rate paid on the company's debt. For example, if the ROA is 25 percent and the interest rate paid on its debt was 15 percent, the business's profit is 10 percentage points more than it paid in interest.

How is Retun on Assets ROA calculated

It is calculated by dividing a company's annual earnings by its total assets. ROA is usually noted as a percentage.

Similar metric to Retun on Assets ROA

Where asset turnover informs an investor about the total sales for each $1 of assets, Return on Assets tells an investor how much profit a company generated for each $1 in assets. ROA is sometimes also referred to as Return on Investment.

When to use Retun on Assets ROA

Use this ratio to compare your business' performance to your industry's norms and standards.

The formula for Retun on Assets ROA

                    Earnings before Interest and Taxes (EBIT)
Return on Assets = -------------------------------------------
                             Net Operating Assets

Earnings before interest and taxes (EBIT) divided by net operating assets.

Is there any other ratio related to this?

Yes, finance practicioners use other ratios when they analyze financial health of companies. For example the following:

Return On Equity (ROE),

Return on Investment (ROI),

Quick Ratio (QuR),

Capital Adequacy Ratio (CAR),

or the Cash Asset Ratio (CAR).


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