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RETURN ON ASSETS
The Return on Assets (ROA) percentage shows how profitable a company's assets are in generating revenue.
ROA can be computed as:
Return on Assets = (Net Profit Margin) * (Total Asset Turnover)
or
ROA = Net Profit / Total Assets = (Sales/Total Assets) (Net Profits/Sales)
This number tells you "what the company can do with what it's got", ie how many dollars of profits they can achieve for each dollar of assets they control. It's a useful number for comparing competing companies in the same industry. The number will vary widely across different industries. Capital-intensive industries (like railroads and nuclear power plants) will yield a low return on assets, since they have to spend such assets to do business. (And if they have to pay a lot to maintain these assets, that will decrease the ROA even more, since the maintenance costs will decrease their earnings). Shoestring operations (software companies, job placement firms) will have a high ROA: their required assets are minimal.
When to use it:
Return on assets is an indicator of how profitable a company is. Use this ratio annually to compare your business' performance to your industry's norms.
See also
External links
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