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The more a company can earn relative to its total assets, the more productive it is.
As companies that are more productive can generate more long-term profits, they are highly regarded byanalysts and investorsalike.
But, how exactly can you calculate what a companys return on assets is?
Heres all youll need to know about ROA.
All you have to do to calculate it is divide a companys net income by its total assets.
Dividing $100,000 by $1 million results in an ROA of 10%.
Its actually amore complicated calculation.
In accounting terms, total assets can be calculated in one of two ways.
What Does a High Or Low ROA Mean?
However, ROA doesnt exist in a vacuum, and it isnt an absolute measure.
Other sectors are asset-light, making it easy to post an ROA above 20%.
Industries that have higher ROAs are typically service-oriented, with fewer assets on hand.
This makes it easy to boost ROA.
Common examples include software companies,banksand consulting companies.
Lower-ROA industries which are typically asset-rich include utilities and airlines.
What Factors Affect the ROA?
A companys return on assets are affected by numerous variables.
Heres a look at the components affecting ROA.
The higher the income a company can generate, the higher its ROA will go.
Expense Control
The better a company can control its expenses, the more profit it will make.
External vs. Internal Factors
Internal factors are one of the primary determinants of ROA.
Internal factors include things like good management and high-quality products that are in demand.
However, ROA can be affected by external factors as well.
Government policies can also affect companies, especially in terms of tax policies or industry regulations.
Any combination ofincreased profitabilityor a reduced asset will boost ROA.
Final Take
Return on assets can be a key way to evaluate the performance of a company.
However, ROA doesnt exist in a vacuum.
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