Kent, Erik Benrud, and Gary N. ROA gives a manager, investor , or analyst an idea as to how efficient a company's management is at using its assets to generate earnings. The Advantage of Tax-Advantaged Funds.
Personal Finance. The assets are read from the balance sheet and include cash and cash-equivalent items such as receivables, inventories, land, capital equipment as depreciated, and the value of intellectual property such as patents.
How Return on Equity Works Return on equity ROE is a measure of financial performance calculated by dividing net income by shareholders' equity. Depending on the economy, this can be a healthy return rate no matter what the investment is. Thus the ROA for a quarter should be based on net income for the quarter divided by average assets in that quarter.
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A lucrative software company that sells downloadable programs online may generate the same net profits, but it could have a significantly higher ROA than its more asset-heavy counterparts.
Financial Dictionary. Therefore ROA is used by investors as one of several ways of measuring a company within an industry, comparing it with others playing by the same rules.
Financial Ratios. Popular Courses. Related Articles. Return on assets ROA is most useful for comparing companies in the same industry, as different industries use assets differently.
For example, banks tend to have a large number of total assets on their books in the form of loans, cash, and investments. Today's Must Reads. Due to the increasing popularity of e-commerce, brick and mortar retail companies have taken a hit in the level of profits they generate using their available assets. Financial Analysis.
A company's return on assets ROA is calculated as the ratio of its net income in a given period to the total value of its assets.
What is a Small-Cap Stock? Thomson South-Western, 2005. Compare Popular Online Brokers.