Return on Asset

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

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. And 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.

Resources

For statistical information about industry financial ratios, please go to the following websites: www.bizstats.com and www.valueline.com.

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