How to Calculate the Return on Assets Ratio
The Return on Assets (ROA) ratio provides an indication of how profitable a company is relative to its total assets. The ROA ratio demonstrates how much income management has been able to produce from a dollar’s worth of company assets. For this reason, investors often use this ratio to evaluate company management. The ROA is displayed as a percentage and is calculated by dividing annual earnings by total assets. As many companies see wide swings in assets during the course of a year (particularly those whose business is seasonal), the ROA is reported as an average of the firm’s assets during that statement period.
Calculating Return on Assets
The assets of the company are comprised of debt and equity, since both of these types of financing are used to fund the operations of the company. The higher ROA number the better as it indicates that the company is earning more money with less investment.
Like most financial ratios, the real value is in comparing ROA ratios from previous years and with the industry competitors. A low return on assets ratio compared to industry averages indicates inefficient use of company assets.
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How to Collect the Data for this Calculation
To retrieve the data you will need for the calculation, go to Yahoo! Finance and enter the company stock symbol in the Get Quotes window. You can obtain the net income figure from the
Return on Assets v. Return on Equity
The big difference between ROA and ROE is company debt. For a company with no debt, its shareholders’ equity and its total assets are the same, meaning its ROA and ROE would also be the same.
To illustrate this, if a company that previously had no debt, its ROE would increase above ROA. By taking on debt, the company increases its assets with the money it acquires. But, because Equity = Assets - Total Debt, a company decreases its equity by increasing debt.
Importance of the ROA Measure
Savvy investors know that well-managed companies seek to control their major investments and seek only those investments that will bring solid returns. The Return on Assets measure is a way to determine how well the company is able to make good decisions on how to spend its money on additional assets.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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