See Also:
Financial Ratios
Internal Rate of Return Method
Net Present Value Method
Net Present Value vs Internal Rate of Return
Required Rate of Return
What The CEO Wants You to Know
Return on Asset Definition
Return on asset (ROA) reveals how much profit a company earned in comparison to its overall asset. The value of ROA varies from industry and company. In general, the higher the value, the better a company is.
Return on Asset Formula
Return on Asset = Net income ÷ Average asset
Or = Net profit margin * Asset turnover
Return on Asset Calculation
Example: a company has $2,000 in net income, and $20,000 in average asset. Return on equity = 2,000 / 20,000 = 10%
This means that has $0.1 of net income for every dollar of asset invested.
Applications
Return on assets measures profit against the assets a company used to generate revenue. It is an important indicator of the asset intensity of a company. A lower ratio means a company is more asset-intensive, and vice versa. Additionally, a more asset-intensive company needs more money to continue generating revenue. Return on asset ratio is useful for investors to assess a company’s financial strength and efficiency to use resources. It is also very important for management to measure its performance against its planned business goals, or market competitors.
If you want to increase the value of your organization, then click here to download the Know Your Economics Worksheet.
Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.
Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs
Resources
For statistical information about industry financial ratios, please go to the following websites: www.bizstats.com and www.valueline.com.