Know everything about Return on Asset (ROA)
Formula for Return on Asset (ROA) = Net Income / Total Assets
What is Return on Asset (ROA)?
Return on assets (ROA) is a financial statistic that measures how profitable a firm is in comparison to its total assets. ROA can be used by corporate management, analysts, and investors to measure how efficiently a company uses its assets to make a profit.
A greater ROA implies that a corporation is more effective and productive in managing its balance sheet in order to create profits, whereas a lower ROA suggests that there is potential for improvement.
Formula for ROA with Example
Return on Asset (ROA) = Net Income / Total Assets
For example, let’s assume Ram and Shyam both start a snacks stall. Ram spends Rs 15,000 on a metal cart, while Shyam spends Rs 1,50,000 on a zombie apocalypse-themed unit, complete with costume.
Let's assume that those were the only assets each firm deployed. If over some given period, Ram earned Rs 1,500 and Shyam earned Rs 12,000, Milan would have the more valuable business but Ram would have the more efficient one. Using the above formula, we see Ram’s simplified ROA is Rs 1,500 / Rs 15,000 = 10 per cent, while Shyam's simplified ROA is Rs 12,000/Rs 1,50,000 = 8 per cent.
How Is ROA Used by Investors?
Investors can use ROA to identify stock opportunities since it demonstrates how efficiently a firm uses its assets to produce profits. A rising ROA shows that the company is doing well at boosting earnings with each investment dollar spent. ROA can also be used to compare companies in the same sector or industry on an apples-to-apples basis.
As a result, it can be concluded that ROA is a useful financial performance statistic that investors can use to gauge the company's asset usage and management capabilities.