Investments are measured based on their return or return potential. The return for an asset is measured in many different ways. In general, the return is the calculated by dividing the profit from the investment by the cost of the investment. This is also the case for return on assets.
Return On Assets
Return On Assets is calculated by dividing company earnings or net income by the value of assets. Net income is found at the bottom of the income statement which is in the annual report. Total asset value is found on the balance sheet which can also be found within the annual report. ROA is used as a way to measure management's ability to make a profit from the company's assets.
As an example, assume a company has $100,000 in net income at the end of the year. Since the balance sheet is a snapshot of company assets, analysts must take an average of total assets from two consecutive years for the calculation. If the company has $1 million in assets in Year 1 and $2 million in Year 2, the average is $1.5 million. ROA is calculated by dividing $100,000 by $1.5 million. This number is then multiplied by 100 for a percentage.
One advantage of the ROA calculation is the ease with which investors can interpret results. Following the example above, the ROA is equal to 6.7 percent. This tells the analyst or investor that management can make .067 cents on every dollar of assets invested with the company. The higher the ROA, the more efficient management is at managing and using company assets.
Another advantage of using ROA is that it can be easily compared against the ROA for other companies in the same industry. In general, companies with a high degree of assets in capital intensive industries, such as steel or utilities, will have a lower return on assets since they are forced to purchase such expensive assets in order to operate and vice versa.
Advantages and Disadvantages of Technology in Education
Technology in education has blossomed in the form of course-specific web pages, email communication, online courses, and tools used specifically in the...
How to Read a Road Map
While technology is increasing at such a fast pace that many new cars now have installed GPS units--which tell you how to...
How to Use Ratios to Construct Financial Statements
Ratios express relationships between two or more financial statement items. They are useful in comparing a company's financial performance against its own...
Definition of Return on Total Assets
Managers, investors and lenders use financial ratios to measure the health of a company. One set commonly used are the profitability ratios....
The Advantages & Disadvantages of the Internal Rate of Return Method
The internal rate of return method considers the time value of money and is easy to interpret, but the rate of return...
The Advantages of Return on Equity
Return on equity divides earnings by book value --- the value of assets without corresponding liabilities --- to see how effective management...
Advantages & Disadvantages of Tires
When it comes to performance, your car's tires are (literally) where the rubber meets the road. It matters very little how good...
The Advantages of Performance Measurement
When an employee is hired, there are certain expectations an employer has for job performance. Unless those expectations are defined clearly, the...
How to Calculate Return on Assets
Calculate return on assets by dividing the net income by the average total assets in order to generate returns for the shareholders....