Return on Assets

Return on assets is a key profitability ratio which measures the amount of profit made per dollar of assets that they own.  It measures the companies ability to generate profits before leverage with it's own assets, rather than by using leverage in the form of shareholders' equity or other debt liabilities.  Generally speaking, the higher this number is, the more effective the company is in utilizing its assets.  Return on assets is a key profitability measure which can be used to measure relative efficiency of companies within the same industry who have a similar product or service line.  ROA is not useful when comparing sectors against each other, companies within different sectors, or even sometimes companies within the same sector.  Even though a company may be in the same sector, it does not mean that it will have a similar product or service offering.  Typically, this number is most useful when using it as a historical benchmark that a company uses to measure it's relative performance against past periods. 

Sector to sector comparisons are misleading due to the fact that some sectors are far more capital intensive, requiring large capital expenditures up front to run their business.  Oil and telecommunications are good examples of industries that are extremely capital intensive.  Their return on asset ratio may yield a lower result than that of a consulting company who has very low asset requirements.

Return on Assets Formula:

Return on Assets Formula

Net income can be found on the income statement while the Total Assets can be found on the balance sheet
Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...
Day Trading Simulator provides the ability to simulate day trading 24 hours a day from anywhere in the world. TradingSim provides tick by tick data for...

Send this article to a friend.

Enter multiple addresses on separate lines or separate them with commas.