How to calculate ROA? What does ROA mean? Return On Assets or ROA is a financial ratio that can help you analyze the performance of a company or business unit and compare the financial performance to others. This video takes you through the Return On Assets formula, shows you how to calculate ROA, how to interpret ROA, and gives suggestions on how to improve ROA.
Return On Assets links together information from two of the three main financial statements, by taking the bottom line of net profit from the income statement and the left hand side of assets from the balance sheet.
ROA or Return On Assets is defined as Net Income divided by Assets. In other words, the net profit that a company has generated during a year, divided by the book value of the assets that a company owns on the balance sheet date. ROA is an important indicator of business success. Can the company generate a good return on the assets it has invested in?
If you want to improve the ROA performance of the company, you can either work on increasing the numerator of profitability, or reducing the amount in the denominator of assets. Profit can be increased by selling more units, charging a higher selling price, improving the product or service mix, realizing productivity and efficiency, achieving sourcing benefits, or reducing the interest or tax charges. Assets can be reduced by shorter credit terms to customers and improved receivables collections, increasing inventory turns, making selective lease versus buy decisions, improving the asset utilization of property, plant and equipment, or divesting lower margin business units or product lines.
Here’s another way to look at the drivers of Return On Assets performance. ROA is influenced by two factors: ROS or margin performance, and asset turnover which you could call speed or velocity. Do you want your company to perform better on ROA? Dedicate resources to improving margins, as well as to improving speed. If you want to know more about the context of how ROA Return On Assets fits into financial ratio analysis, then please watch my video on DuPont analysis at
Philip de Vroe (The Finance Storyteller) aims to make strategy, finance and leadership enjoyable and easier to understand. Learn the business vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better stock market investment decisions. Philip delivers training in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!
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