Return on assets
Encyclopedia
The return on assets percentage shows how profitable a company's assets are in generating revenue.
ROA can be computed as:
This number tells you what the company can do with what it has, i.e. how many dollars of earnings they derive from each dollar of assets they control. It's a useful number for comparing competing companies in the same industry. The number will vary widely across different industries. Return on assets gives an indication of the capital intensity
of the company, which will depend on the industry; companies that require large initial investments will generally have lower return on assets.
of the assets, some caution is required for companies whose carrying value may not correspond to the actual market value
. Return on assets is a common figure used for comparing performance of financial institution
s (such as bank
s), because the majority of their assets will have a carrying value that is close to their actual market value. Return on assets is not useful for comparisons between industries because of factors of scale and peculiar capital requirements (such as reserve requirements in the insurance
and banking industries).
Return on assets is one of the elements used in financial analysis using the Du Pont Identity
.
ROA can be computed as:
This number tells you what the company can do with what it has, i.e. how many dollars of earnings they derive from each dollar of assets they control. It's a useful number for comparing competing companies in the same industry. The number will vary widely across different industries. Return on assets gives an indication of the capital intensity
Capital intensity
Capital intensity is the term in economics for the amount of fixed or real capital present in relation to other factors of production, especially labor...
of the company, which will depend on the industry; companies that require large initial investments will generally have lower return on assets.
Usage
Return on assets is an indicator of how profitable a company is before leverage, and is compared with companies in the same industry. Since the figure for total assets of the company depends on the carrying valueBook value
In accounting, book value or carrying value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or Impairment costs made against the asset. Traditionally, a company's book value...
of the assets, some caution is required for companies whose carrying value may not correspond to the actual market value
Market value
Market value is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with open market value, fair value or fair market value, although these terms have distinct definitions in different standards, and may differ in some...
. Return on assets is a common figure used for comparing performance of financial institution
Financial institution
In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries...
s (such as bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s), because the majority of their assets will have a carrying value that is close to their actual market value. Return on assets is not useful for comparisons between industries because of factors of scale and peculiar capital requirements (such as reserve requirements in the insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
and banking industries).
Return on assets is one of the elements used in financial analysis using the Du Pont Identity
Du Pont Identity
DuPont analysis is an expression which breaks ROE into three parts....
.
See also
- Rate of return on a portfolioRate of return on a portfolioThe rate of return on a portfolio is "a weighted average of the rates of return on the various assets with the weights being equal to the fractions of the individual's wealth held in these assets" This equates to an average of the average returns on a portfolio taking into account what portion of...
- Return on capital
- List of business and finance abbreviations