Return on assets (ROA) is a financial metric that measures a company’s efficiency in generating profits from its total assets<\/a>. It provides insight into how effectively a company is utilising its resources to generate earnings. <\/span><\/p>\n ROA is expressed as a percentage and is widely used by investors, analysts, and managers to assess a company’s financial performance.\u00a0<\/span><\/p>\n To calculate return on asset, the following formula can be used:<\/span><\/p>\n Return on assets = (net income<\/a> \/ total assets) x 100%<\/span><\/p>\n A higher ROA indicates that a company is using its assets more efficiently to generate profits<\/a>. It suggests that the company is effectively managing its resources to generate returns for its shareholders. On the other hand, a lower ROA may indicate that the company is less efficient in generating profits from its assets. This could be due to various factors, including high operating costs<\/a> or underutilisation of assets.<\/span><\/p>\n Monitoring ROA over time can provide insights into a company’s operational efficiency and management effectiveness. Improving ROA over time is often a positive sign of a company’s financial health.<\/span><\/p>\n ROA does not account for differences in financing or capital structure. A company might achieve a higher ROA by using more debt, which can also increase financial risk. Furthermore, it does not provide insights into the absolute size of profits. A company may have a high ROA but still generate relatively low profits if it has a small asset base.<\/span><\/p>\n Let’s consider a fictional company, XYZ Corporation. XYZ Corporation reported a net income of $500,000 for the year ending December 31, 2023. Their total assets at the beginning of the year were $5,000,000, and at the end of the year, they were $6,000,000.<\/p>\n To calculate ROA we use the formula from above with the average total assets being $5,500,000:<\/p>\n ROA = $500,000 \/ $5,500,000 = 0.0909 or 9.09%<\/p>\n This means that for every dollar of assets XYZ Corporation holds, it generated approximately 9.09 cents in net income during the year.<\/p>\n","protected":false},"author":1,"template":"","class_list":["post-31751","business-glossary","type-business-glossary","status-publish","hentry"],"acf":[],"featured_image_urls_v2":{"full":"","thumbnail":"","medium":"","medium_large":"","large":"","1536x1536":"","2048x2048":"","image_blog":"","image_podcast":"","image_banking":"","image_blog_internal":"","image_blog_medium":"","image_single_banking":""},"post_excerpt_stackable_v2":" Definition Return on assets (ROA) is a financial metric that measures a company’s efficiency in generating profits from its total assets. It provides insight into how effectively a company is utilising its resources to generate earnings. What is return on assets? ROA is expressed as a percentage and is widely used by investors, analysts, and managers to assess a company’s financial performance.\u00a0 To calculate return on asset, the following formula can be used: Return on assets = (net income \/ total assets) x 100% A higher ROA indicates that a company is using its assets more efficiently to generate profits.…<\/p>\n","category_list_v2":"","author_info_v2":{"name":"root","url":"https:\/\/swoopfunding.com\/au\/author\/root\/"},"comments_num_v2":"0 comments","_links":{"self":[{"href":"https:\/\/swoopfunding.com\/au\/wp-json\/wp\/v2\/business-glossary\/31751","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/swoopfunding.com\/au\/wp-json\/wp\/v2\/business-glossary"}],"about":[{"href":"https:\/\/swoopfunding.com\/au\/wp-json\/wp\/v2\/types\/business-glossary"}],"author":[{"embeddable":true,"href":"https:\/\/swoopfunding.com\/au\/wp-json\/wp\/v2\/users\/1"}],"wp:attachment":[{"href":"https:\/\/swoopfunding.com\/au\/wp-json\/wp\/v2\/media?parent=31751"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}What is return on assets?<\/h3>\n
Example of return on assets<\/h3>\n