![]() ![]() The higher the percentage, the more productive the business is. The ROA can be calculated by comparing a company's net income (also known as net profit) and average or total assets. ![]() ROA Essentialsįor starters, let's elaborate on how to calculate ROA, and take an in-depth look at its limitations and other key points. That way, managers, investors, and analysts engage in assessing whether a certain company has been generating a healthy profit in relation to the value of its investments. It measures a specific business's efficiency, determining whether it has decreased or increased during a certain period. In a nutshell, return on assets is the profitability ratio companies use as an indicator of their performance. So, keep reading to learn how to use the return on assets formula to evaluate a company's profitability and check how it stacks up against the competition. And while this metric is in wide use nowadays, it still has certain limitations. They also refer to the ROA to compare the performance of different businesses. We can help to keep cash flowing through your business helping with ad hoc payments or recurring payments.Return on assets is a metric many analysts and investors use to determine how profitable a company is. The more efficiently a business is run, the higher the return on assets percentage will be, and the latest payments technology from GoCardless can play a part in making that happen. ![]() In comparison, the same figures for two other major oil companies in 2017 were as follows: This means that for every dollar of assets held by Exxon in 2017 the company generated 5.8 cents in profit. Calculating the return on assets for Exxon over this period therefore means dividing $19.7 billion by $339.5 billion, which gives a figure of 5.8%. In 2017, the net income of Exxon – meaning the profits after expenses – was $19.7 billion. In 2017 the total assets of Exxon were valued at $349 billionīy adding these two figures together and dividing by two we arrive at the average assets over the period 2016/2017 of $339.5 billion. In 2016 the total assets of Exxon were valued at $330 billion Perhaps the easiest way of explaining how return on assets calculations work is to give a real world example, in this case using the Exxon Mobil Corporation: Return on Assets = Net Profit / Average Assets An example of a return on assets calculation The calculation can be set out as follows: The return on assets figure is calculated by taking the net income of a business and dividing that figure by the total assets of the company. While comparing profits to revenue gives an idea of how successfully a business is operating, making a comparison between those profits and the resources that had to be exploited to generate the profits gives a much fuller picture, and the good news is that the return on assets formula is, in basic terms, actually fairly simple. Calculating the return on assets of a number of different companies of comparable size working in the same sector makes it possible to see which of those businesses is the most well run. Once it has been calculated, the return on assets is expressed as a percentage, and the higher the percentage is the better it is for the business in question. At face value this may seem like a fairly simple question to answer the income a business generates minus the expenses it incurs will leave you with a figure which represents the profit generated by a business.Ĭalculating the return on assets, however, delivers a far more accurate picture of how efficiently a business is making use of the assets it owns. One of the most important questions you can ask yourself when looking at a business – particularly if you’re thinking of working with or investing in that business – is how profitable it is. ![]()
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