Wednesday, 25 January 2012

Return on Asset Analysis

Return on Asset Definition:
Return on asset (ROA) reveals how much profit a company earned in comparison to its overall asset. The value of ROA varies from industry and company. In general, the higher the value, the better a company is.


Return on Asset Formula:
Return on Asset = Net income ÷ Average asset


Or = Net profit margin * Asset turnover


Return on Asset Calculation:
Example: a company has $2,000 in net income, and $20,000 in average asset. Return on equity = 2,000 / 20,000 = 10%


This means that has $0.1 of net income for every dollar of asset invested.


Applications:
Return on assets measures profit against the assets a company used to generate revenue. It is an important indicator of the asset intensity of a company. A lower ratio means a company is more asset-intensive, and vice versa. And a more asset-intensive company needs more money to continue generating revenue. Return on asset ratio is useful for investors to assess a company’s financial strength and efficiency to use resources. It is also very important for management to measure its performance against its planned business goals, or market competitors .

Source:--------->wikiCFO

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