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Return on Assets (ROA)

 
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The financial metric Return on Assets (ROA) evaluates how efficiently a company uses its assets to generate a profit. ROA is calculated by dividing the company's total annual earnings by the total assets of the company. The financial Metric ROA is displayed as a percentage. The formula of ROA is depicted below.

 

The formula:

 

ROA =

Net Income

Total Assets

 

The ROA figure gives investors and financial analyst some indication of how effectively companies are converting its assets, the money it holds to invest in running and developing the company, into net income. ROA should be as high as possible, which would indicate that a company is using its assets efficiently, and that the company manages to earn an acceptable profit of its assets.

 

For instance, if company X has an annual net income of $2 million and total assets of $10 million, its ROA is 20%. In comparison, if company Y has the same annual net income but total assets of $15 million, the ROA for company Y is 13,3%. By comparing the ROA of these two companies, investors will likely see company X as a better investment, because company X consumes fewer assets to generate the same earnings as company Y.  

 
 
 
 
 
Date Created: 2009-10-27
Posted by: Admin
 
 
 

Related resources:

Return on Investment (ROI)
Return on Equity (ROE)
Return on Sales (ROS)
Return on Capital Employed (ROCE)
Contribution Margin and Contribution Margin Ratio
Reference(s)
 
Keywords:
Online MBA, Online MBA Courses, Return on Assets, ROA, example, formula, calculation

 


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