ROA plays an major roles in making investment decision for new venture. Generally, investors use ROA to determine if they should invest in a new product line or company. If the ROA is more than their cost of investing than the investment should be made. If the ROA is less than their cost of investing than the investment should be avoided. Along with investment decisions, ROA also provides insights about management’s proficiency in utilizing assets for existing investment. A high ROA indicates a very successful management strategy in utilizing assets.
Use the Calculator above to calculate Return on Assets. However, below is an example of return on assets.
In, 2008 a company has Net income of $500,000. It has current PPE value is $350,000 and current assets of $100,000. What is the company’s ROA and explain what it means?
Find the Net Income.
In this example net income is straightforward $500,000.
Find the Total Assets.
PPE $350,000 + Current Assets $100,000 = $450,000
Find the Return on Assets (ROA)
ROA = Net Income/Total Assets = $500,000/$450,000
ROA = 1.1
A ROA of 1.1 means that the company ears 1.1 dollar for every dollar of asset. This seems to be relatively low Return on Assets. However, like all other financial Ratio we need to compare this value to industry standard to fully understand the company’s performance.
Debt to Equity Ratio
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