MASTERCLASS – ROA – Return on Assets

Return on Assets

Return on Assets

In our Masterclass today we look at Return on AssetsROA, which is a ratio (one figure divided by another) measuring the profitability of a (non-financial) firm, expressed as a percentage of the operating assets – ie comparing profit to assets. ROA indicates a firm’s efficiency to allocate and manage its resources but unlike return on equity ROA ignores the firm’s liabilities. It can also be called return on total investment (ROTI). The formula to calculate is:

Profit (Net Operating Income) ÷ Total (Operating) Assets

This indicates how profitable a company is compared to its total assets. ROA is displayed as a percentage. Sometimes this is referred to as “return on investment”. Sometimes interest expense is added back into net income when calculating because they’d like to use operating returns before cost of borrowing.

ROA tells you what earnings were generated from invested ASSET capital. ROA for public companies can vary substantially and is very dependent on the industry of the business, so it is best to compare it against a company’s previous ROA numbers or the ROA of a similar company in that industry.

The assets of the company can be expressed as containing both debt and equity. Both of these are types of financing and are used by business managers to fund the operations of the company. ROA figure gives investors an idea of how effectively the company is converting the money it has to generate into profit/net income return. The higher ROA is, the better, because the company is earning more money on less assets (investment).

To give an example:

  1. One company A has a net income of $0.5 million and total assets of $2.5 million, its ROA is 20%;
  2. Another company B earns the same amount $0.5 million, but has total assets of $10 million, it has an ROA of 50%.

Comparing these examples, company A is better at converting its investment into profit.

The aim is for managers to excel at making large profits with little investment.

What are your thoughts? Start or continue the conversation here!


About SuperBenefitnews

Self-Managed Superannuation Service Providers in Australia. SuperBenefit provides a wholistic SMSF assistance, education and administration service continuum - 1. “assistance” is help of whatsoever nature where our overall SMSF experience and knowledge enables us to provide assistance/help without any legal (or “license”) limitations. 2. “education” involves providing knowledge through teaching, coaching and mentoring about all matters SMSF, including (but not limited to) investment issues such as equities and property, 3. “administration” encompasses all admin aspects of legally required SMSF trustee and member record keeping including (but not limited to) audit and ATO matters. In keeping with our key point that SuperBenefit does not provide Financial Advice, where issues arise from 1, 2, and/or 3 above Indicate a need for a legally authorized provider (such as a Financial Adviser) and the client does not have their own service provider, the client can utilize SuperBenefit’s ‘Connect Assist’ … SuperBenefit, in itself, does not provide Financial Advice, but it does provide the wherewithal for great SMSF service. WE do not provide Financial Advice or any other service that requires a legally authorized provider. However, where such advice or service is required we have our ‘Connect Assist’, a SuperBenefit resource we use to connect clients to a Licensed Advisor or other legally authorised service provider. Call us 0407 361 596, no obligation FREE Connection call to see how we can help you!
This entry was posted in Masterclass Investment, SMSF Investing and tagged , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s