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Return on Assets

Return on Assets (ROA) – a ratio indicating the efficiency of company’s asset utilization process by measuring the amount of net income, generated by 1 dollar of company’s assets value. Assets represent all material and financial resources of the company, which are reflected on its statement of financial condition (balance sheet), whereas information about firm's net income can be derived from its profit and loss report.

The higher the ratio, the more efficient company's asset management process is. However ROA is only comparable for similar-sized companies, because the higher the level of capitalization of a firm, the more difficult it is to reach high return on assets. This ratio commonly is an object of interest of company's management, because it includes all kinds of assets to calculation; while shareholders usually prefer the analysis of the return on equity ratio, since it focuses on the part of the capital representing their direct involvement.

Formula(s):

Return on Assets = Net Income Before Noncontrolling Interest of Earnings and Nonrecurring Items ÷ Average Total Assets

Example:

Return on Assets (Year 1) = 162 ÷ 1282 = 0,12

Return on Assets (Year 2) = 343 ÷ 1740 = 0,19

For year 1 return on assets was 0,12, witnessing the ability of a firm to earn $0,12 of net income per every dollar of company’s assets value. In year 2 this ratio has increased to 0,19, indicating the positive dynamics in firm’s net income earning ability in comparison to its total assets.

Conclusion:

Return on assets is a ratio measuring firms profitability and asset utilization activity. Increasing trend of this ratio means that the company is improving its profitability. In opposite to this, decreasing trend indicates firm's profitability deterioration.