MASTERCLASS Investment – What is Return on Assets (ROA) – what it means and how to calculate

MASTERCLASS Investment – What is Return on Assets (ROA) – what it means and how to calculate

Investment – What is Return on Assets (ROA) – what it means and how to calculate

Return on Assets (ROA), is a ratio (which means one figure divided by another) measuring the profitability (return) as a percentage of the operating assets – it means we are comparing profit to assets. ROA is an indication of a firm’s efficiency to allocate and manage its resources and return a profit, but unlike Return on Equity, ROA ignores the firm’s liabilities. It is also called Return on Total Investment (ROTI).

The formula for how to calculate ROA is:

ROA = Profit (Net Operating income) ÷ Total (Operating) Assets.

ROA is displayed as a percentage. Sometimes this is referred to as “return on investment”. Sometimes interest expenses are added back into net income when calculating because they’d like to use operating returns (operating profit) before cost of borrowing is taken into account.

ROA reveals 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. The 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 the ROA is, the better, because the company is earning more money on the assets (investment).

To give an example:

  • One company A has a net income of $0.5 million and total assets of $2.5 million,  hence 0.5/2.5 and its ROA is 20%;
  • Another company B earns the same income amount $0.5 million, but has total assets of $10 million, it has an ROA of 5%.

Comparing these examples in the same industry, company A is better at converting its investment into profit.

One would also look at the ROA of each company over the last 3-4 years to see what the trend is – the aim is for managers to excel at making better profits with little investment. That can indicate a good company that is worth investing our money in.

Want to learn the core issues of share investing?

See our slides SMSF & Shares Overview to get a quick session where you can learn to easily understand Company Financial Statements, how to find healthy companies, what Tools and Ratios to use, work on examples, and also includes how to get better investment outcomes.

If you have questions, call 0407 361 596

Advertisements

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 Investing - Stock Fundamentals, Masterclass Investment, SMSF Investing and tagged , , , , , , . Bookmark the permalink.

Leave a Reply

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

WordPress.com Logo

You are commenting using your WordPress.com 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