Return on Assets ROA compare the profit the company makes with the assets that generates it. The value competed is important because it tells you what you the company ought to do. It shows the revenue earned from the dollars invested in assets. The ratio finds a lot of application especially in comparing companies that compete and are in the same industry. Calculating the returns on assets gives an indication on how intensive the capital of the company has been invested. Firms that have a low ratio means that there is a heavy investment on the capital goods. Generally the return on assets is an indication of how profitable the company is before leverage. The figure can be used in comparing the performance of the company and other companies in the same industry. The ratio is used when carrying out financial analysis of the company. The ratio can be used to tell the level of assents that the company needs to be able to generate 1$ it is computed by dividing the net income or the net profit divided by the average assets.
The return on assets figure informs the business person the sales realized from every dollar invested. The figure calculated helps the company estimate the assets intensity of the business. It is expected that companies that utilizes expensive machineries and equipment to generate profits such as rail companies and telecommunication will have a low ratio as compared to software companies which are expected to have high Roa figures.
Though return on assets measures the net income in relation to the resources deployed, it can be relied on by the shareholders to tell them how much returns they expect from their investments. If a company has no debt, the figures for return on assets will be similar to that for the return on equity. There are two methods that can be adopted by companies when trying to compute the figure for the return on the assets. The two methods are;
1 ROA= net profit margin X asset turnover
2 ROA = Net income / average assets for that period.
The return on assets ratio can be able to tell you how good a business is. If you get a lower profit per dollar invested in the assets, it points out on how asset intensive the business is. If however the profit per dollar invested in the assets is high, it is a clear indication that the company is not asset- intensive, ceteris paribus. If the figure is more than 20%, it means that the company in question is not asset intensive. However if the figure is less than 5% , it points towards the fact that the company is asset intensive and it suggests that it is either a manufacturing firm or a rail road.
Before embarking on the calculation of ROA, it is imperative that the figure for the net profit margin be computed. It is mandatory that you compute the figure for asset turnover. The good thing is that in the analysis section, this figure will have to be calculated thus eliminating the need to compute it again.
কোন মন্তব্য নেই:
একটি মন্তব্য পোস্ট করুন