Return on Assets (ROA)
What Is Return on Assets (ROA)?
Return on assets is a profitability ratio that is useful in determining a company's ability to produce profits from its assets. Investors frequently compare it to return on equity, one more ratio connected with dissecting a company's profitability. Also, similar to return on equity, return on assets is more helpful in contrasting companies inside a similar industry.
Instructions to Calculate Return on Assets
The easiest method for ascertaining return on assets is to separate net income by assets (this formula is connected with return on equity's). Return on assets is probably going to be a lower ratio than return on equity on the grounds that while return on equity considers book value by deducting liabilities from assets, return on assets doesn't. Communicated as a percentage, return on assets demonstrates how much per dollar of assets converts into earnings. A higher ratio recommends that a company's executive management is utilizing its assets, like cash, inventory — as well as property, plants, and equipment — efficiently and successfully in generating profits.
Net income is found in the income statement section of the financial statement of a publicly traded company's customary quarterly and annual filings with the Securities and Exchange Commission. Assets are found in the assets, liabilities, and equity section of the balance sheet. It shows up as the detail "Total Assets," and is netted against "Liabilities and Equity," a separate detail (since assets must rise to liabilities and equity on the balance sheet).
One more variant of computing return of assets is through book value. At the point when a company's executive management is hoping to assume control over another company, they survey the targeted company's long-term assets, commonly the book value of assets, which is the acquisition, or original, costs of assets minus their accumulated depreciation, or depreciation over the lifetime of the assets. Property, plant, and equipment — on a net premise — appears as the assets' book value. On the off chance that not, then it would involve ascertaining those assets and their depreciation. Executives would then survey the company's net income and add back interest expense for the period.
Note: Book value of assets varies from book value of equity, which is basically net assets — calculated as assets minus liabilities. One more term for book value of equity is shareholders' equity.
Step by step instructions to Interpret Return on Assets
In the table below, return on assets is assembled for Tesla, Ford Motor, and General Motors, which are all in the automotive industry. Their assets and profits change, but since they are in similar industry, their exhibitions can measure up by utilizing profitability ratios. To streamline any volatility in assets between two years, the average is likewise calculated. GM posted the best return on assets in five of the six years — in 2017, be that as it may, Ford performed better. The data recommend GM was best at using its assets to produce earnings, and the returns on assets were to a great extent in accordance with the returns on equity over that six-year period. In the mean time, Tesla was finding Ford and GM in 2020, when it posted its most memorable year of annual profit.
| 2020 | Change (Year-on-Year) | 2019 | Change (Year-on-Year) | 2018 | Change (Year-on-Year) | 2017 | Change (Year-on-Year) | 2016 | Change (Year-on-Year) | 2015 | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Tesla | |||||||||||
| Net Income | 690 | N/A | -870 | N/A | -976 | N/A | -1,962Â | N/A | -675 | N/A | -889 |
| Assets | 52,148 | 52% | 34,309 | 15% | 29,740 | 4% | 28,655Â | 26% | 22,664 | 181% | 8,068Â |
| Book Value of Equity | 22,225 | 236% | 6,618 | 34% | 4,923 | 16% | 4,237Â | -11% | 4,753 | 338% | 1,084Â |
| ROA | 1.3% | -2.5% | -3.3% | -6.8% | -3.0% | -11% | |||||
| ROA, Based on Average Assets of 2 Years | 1.6% | -2.7% | -3.3% | -7.6% | -4.4% | ||||||
| ROE | 3.1% | -13.1% | -19.8% | -46.3% | -14.2% | -82.0% | |||||
| ROE, Based on Average Assets of 2 Years | 4.8% | -15.1% | -21.3% | -43.6% | -23.1% | ||||||
| Ford | |||||||||||
| Net Income | -1,279Â | N/A | 47 | N/A | 3,677Â | -52% | 7,731 | 68% | 4,596 | -38% | 7,373Â |
| Assets | 267,261 | 3% | Â 258,537 | 1% | 256,540 | -1% | 258,496Â | 9% | 237,951 | 6% | 224,925Â |
| Book Value of Equity | 30,811 | -7% | 33,230Â | -8% | 35,966 | 1% | 35,606 | 22% | 29,187Â | 2% | 28,657Â |
| ROA | -0.5% | 0.0% | 1.4% | 3.0% | 1.9% | 3.3% | |||||
| ROA, Based on Average Assets of 2 Years | -0.5% | 0.0% | 1.4% | 3.1% | 2.0% | ||||||
| ROE | -4.2% | 0.1% | 10.2% | 21.7% | 15.7% | 25.7% | |||||
| ROE, Based on Average Assets of 2 Years | -4.0% | 0.1% | 10.3% | 23.9% | 15.9% | ||||||
| GM | |||||||||||
| Net Income | 6,247 | -7% | 6,732Â | -16% | 8,014Â | N/A | -3,864Â | N/A | 9,427 | -3% | 9,687Â |
| Assets | 235,194Â | 3% | 228,037Â | 0% | 227,339Â | 7% | 212,482 | -4% | 221,690 | 14% | 194,338Â |
| Book Value of Equity | 49,677Â | 8.1% | 45,957Â | 7% | 42,777 | 18% | 36,200 | -18% | 44,075 | 9% | 40,323Â |
| ROA | 2.7% | 3.0% | 3.5% | -1.8% | 4.3% | 5.0% | |||||
| ROA, Based on Average Assets of 2 Years | 2.7% | 3.0% | 3.6% | -1.8% | 4.5% | ||||||
| ROE | 12.6% | 14.6% | 18.7% | -10.7% | 21.4% | 24.0% | |||||
| ROE, Based on Average Assets of 2 Years | 13.1% | 15.2% | 20.3% | -9.6% | 22.3% |
What Are the Limitations of Return on Assets?
Return on assets works best in looking at companies inside a similar industry in light of the fact that their assets are probably going to be comparative, rather than contrasting companies from various businesses — like banks and retailers, which have various wellsprings of revenue and various assets.
The ratio considers assets and net income from a past period of time, and that would make it a lagging indicator.
While return on equity centers around shareholders' investments into the company, return on assets evaluates the company's ability to produce profits without thinking about liabilities as part of its financial leverage. It is sensitive to working capital, so an increase in inventories could lead to a lower ratio. In any case, ROA isn't as sensitive on financial leverage than ROE is.
Features
- You can work out a company's ROA by isolating its net income by its total assets.
- ROA can be utilized by management, analysts, and investors to determine whether a company utilizes its assets efficiently to produce a profit.
- Return on assets is a metric that demonstrates a company's profitability corresponding to its total assets.
- It's in every case best to compare the ROA of companies inside a similar industry since they'll share a similar asset base.
- ROA factors in a company's debt while return on equity doesn't.
FAQ
How Is ROA Used by Investors?
Investors can utilize ROA to find stock opportunities on the grounds that the ROA shows how efficient a company is at utilizing its assets to produce profits.A ROA that ascents over the long run demonstrates the company is excelling at expanding its profits with every investment dollar it spends. A falling ROA shows the company could have over-put resources into assets that have failed to deliver revenue growth, a sign the company might be in some difficulty. ROA can likewise be utilized to make related things correlations across companies in a similar sector or industry.
What Is Considered a Good ROA?
A ROA of more than 5% is generally viewed as great and more than 20% magnificent. In any case, ROAs ought to continuously be compared among firms in a similar sector. For example, a software maker has far less assets on the balance sheet than a vehicle maker. Subsequently, the software company's assets will be downplayed and its ROA might get a problematic lift.
How Might I Calculate a Company's ROA?
ROA is calculated by separating a company's net income by the average of its total assets. It is then communicated as a percentage.Net profit can be found at the lower part of a company's income statement, and assets are found on its balance sheet. Average total assets are utilized in working out ROA in light of the fact that a company's asset total can shift over the long haul due to the purchase or sale of vehicles, land, equipment, inventory changes, or seasonal sales variances. Subsequently, computing the average total assets for the period being referred to is more accurate than the total assets for one period.
