Return on asset is the profit generated on the investments. The higher the value of ROA, the more efficient the management is in generating profit. ROA method is used to generate profitability ratio.
ROA is a measure of the company’s performance. Return on assets (ROA) is a component of return on equity (ROE), both of which can be used to calculate a company’s rate of growth.
Return on assets shows how profitable a company’s assets are in generating revenue.
Return on assets(ROA) infographics by Kamlesh Rode
What is Return on asset (ROA)?
Return on asset (ROA) is a component of return on equity (ROE), both of which can be used to calculate a company’s rate of growth. Return on assets shows how profitable a company’s assets are in generating revenue.
It is an indicator of how profitable a company is relative to its total assets. ROA is always displayed as a percentage; the higher ROI is, the better for the investors.
ROA also indicates how the company utilizes its assets in terms of profitability
The formula of Return on asset (ROA)
ROA is calculated by dividing a company’s net income by total assets. As a formula, it would be expressed as:
Return on Assets = Net Income/Total Assets
Important of Return on asset (ROA)
1. ROA denotes how efficient is the management in future prospects.
2. It shows the efficiency of the company in terms of profitability
3. The higher ROI, better for investment decisions.
4. ROA is a true measure of business performance
Cons of Return on asset (ROA)
1. It does not work over Intangible assets and this will not be accounted for in return on assets.
2. It is very difficult to get the exact percentage of ROA in the market. Many companies have businesses in other domains, due to this, it is very difficult to get the data of ROA.
3. Return on an asset does not consider the borrowed capital company takes for future growth.
Difference between ROE and ROA
| ROE | ROA |
| ROE measures the rate of return on the shareholder’s equity of common stocks | Return on assets shows how profitable a company’s assets are in generating revenue. |
| Formula ROE = Net Income/Shareholders’ Equity | Formula Return on Assets = Net Income/Total Assets |
| ROE is sometimes called “return on net worth” | ROA is a true measure of business performance |
Read more about ROE
Conclusion
The Return on Asset is a very important ratio, it helps the investor to find the efficiency of the company’s management. In other words, ROA shows the efficiency of the company in terms of generating profits for its shareholders.
Obviously, the higher the ROA, the better it is for the shareholders. In fact, this is one of the key ratios that help the investor identify the key financial value of the company.
ROA is an important factor in the fundamental analysis of a stock company. Read more about fundamental analysis through infographics.
Frequently asked questions
Ans: 5% of Return on asset is generally taken into account for the investment.
Ans: ROA is the return on asset and ROE stands for return on equity. ROA related to actual investment and ROE related to equity growth in the stock market
ROA is calculated by dividing a company’s net income by total assets. As a formula, it would be expressed as Return on Assets = Net Income/Total Assets
Ans: It is difficult to interpret in the stock market. Low ROA means a company losing or earning low profits
