Return on Assets
The same rule applies to a business.
The more assets a business has, the better.
But a sharp business owner isn't just concerned with the number of Assets - they also want to know the Return the Assets are producing.
Knowing the Return on Assets (ROA) helps to understand if the Assets are being used optimally, are overperforming or underperforming?
How do we calculate Return on Assets?
Return on Assets (ROA) is calculated by taking the Net Income produced by the Business and dividing it by the Total Assets.
ROA = Net Income / Total Assets.
The Net Income can be taken from the Income Statement and the Total Assets figure can be taken from the Balance Sheet.
The ROA is expressed as a percentage.
The ROA is a best used when it compares a period of time rather than in isolation.
For example, if a businesses ROA has grown from 18% to 22% over a two year period, the company is improving its utilization of Assets.
Additional insights can be gained if a business owner knows the typical ROA in his or her industry.
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