Return on assets (ROA) is a measure of how well a company is using its assets to generate profits. Managers, analysts, and investors use ROA to evaluate a company's finances. So what is ROA? The formula and how to use ROA, let's find out with Giaiphapdonggoi.net!
1. What is ROA?
Return on assets compares the value of a business's assets to the profits it generates over a period of time. Return on assets is a tool used by managers and financial analysts to determine how efficiently a company is using its resources to generate profits.
What is ROA?
If that sounds abstract, here's how ROA might work at a hypothetical parts manufacturer. The company owns several manufacturing plants, along with the tools and machines used to make the items. It also maintains an inventory of raw materials, plus an inventory of unsold parts. Then there are its unique widget designs, and the cash and cash equivalents it keeps for business expenses.
Generally, this is the property of the widget maker. The amount the company makes from the sale of supplies minus the cost of materials and labor equals its net profit. Divide the company's net profit by its asset value to get ROA.
2. ROA Formula
The calculation of ROA is more complicated taking into account that the value of a company's assets changes over time. To factor this into your calculation, use the average value of assets the company owned during a given year, rather than the total value of the company's assets at the end of the year.
ROA Formula
Once you have determined the average value of a company's assets, divide the net profit by the average assets and multiply it by 100 to get the percentage.
ROA = (Net Income / Total Assets) x 100
To continue the example above, you would average the widget maker's net worth from 2020, finding out that the widget maker's average asset value is just $33,500,000 la, less than the total value at the end of the year. When you divide the company's net profit of $2,500,000 by $33,500,000, you get a ROA of 7.46%. This ROA is more accurate than the 6.49% figure in the example above.
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3. How to use ROA
ROA is a useful metric for evaluating a company's performance. When a company's ROA increases over time, it indicates that the company is squeezing more profit from every dollar it owns in assets. Conversely, a decrease in ROA indicates that a company has not invested well, is spending too much money and may be in trouble.
How to use ROA
However, you should exercise extreme caution when comparing ROA between different companies. ROA is not a useful tool for comparing companies of different sizes or companies that are not in similar industries. Expected ROA can vary even between companies of the same size in the same industry, but at different stages in the company's lifecycle.
For these reasons, it's best to use ROA as a way to analyze a business over time. Planning your company's ROA quarterly or annually can help you understand how well it's doing. Increasing or decreasing ROA can help you understand long-term changes in your business.
4. What is a good ROA?
A ROA of 5% or more is generally considered good, while 20% or more is considered excellent. In general, the higher the ROA, the more efficiently the company generates profits. However, the ROA of any company must be considered in the context of competitors in the same industry and sector.
For example, a high-asset company, such as a manufacturer, might have a ROA of 6% while a low-asset company, such as a dating app, might have a ROA of 15%. If you just compare with the two based on ROA, you may decide the app is a better investment.
However, if you compare the manufacturing company with its closest competitors and they all have ROA below 4%, you can see that it performs much better than its peers. On the contrary, if you look at the dating app compared to similar tech companies, you can find out that most of them have a ROA of close to 20%, which means it actually underperforms other companies. similar company.
5. ROA vs. ROE
ROA vs ROE
Return on equity (ROE) is a financial ratio similar to ROA and both can be used to measure a company's performance.
ROE is calculated by dividing a company's net profit over a given period by its shareholders' equity - it measures how efficiently a company is leveraging the capital it has generated by selling shares . If ROA examines how well a company is managing the assets it owns to create
profits, ROE examines how the company is managing the money its shareholders invest in order to make a profit.
Investors use ROE to understand the performance of their investments in a public company. ROA measures a company's performance on assets in addition to the conclusions you can draw from ROE.
ROA is a simple but widely used indicator among investors. You should combine using ROA with some other metrics to get a comprehensive view of how well your business is performing. We hope that you will have a detailed look at ROA and how to apply it in your stock selection.
See also related articles:
- What is ROE? How to calculate and use ROE?
- What is Relationship Manager? How to become a Relationship Manager?
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