Significance of Return on Assets (ROA)

Return on assets (RoA) measures the net income produced by total assets during a period by comparing net income to the average total assets. Since company assets sole purpose is to generate revenues and produce profits, this ratio helps both management and investors see how well the company can convert its investments in assets into profits. You can look at ROA as a return on investment for the company since capital assets are often the biggest investment for most companies. In this case, the company invests money into capital assets and the return is measured in profits.

You can also watch the below video on Everything you want to know about Return on Assets (ROA):

Impact of Return on Assets

The return on assets ratio measures how effectively a company can turn earn a return on its investment in assets. In other words, ROA shows how efficiently a company can covert the money used to purchase assets into net income or profits. It only makes sense that a higher ratio is more favorable to investors because it shows that the company is more effectively managing its assets to produce greater amounts of net income. A positive ROA ratio usually indicates an upward profit trend as well.

Exceptions

It is useful only for comparing companies in the same industry only since different industries use their assets differently.

Formula

Return on Assets= Net Income/Average Total Assets. Suppose a company’s net profit is Rs 1 crore and its total assets is Rs 10 crore, then its return on assets is 1/10=10%.

StockEdge App

Nowadays we don’t have to calculate RoA on our own. StockEdge gives us RoA of the last year of any company listed in the stock exchange. We can look and compare RoA of any company and filter out stocks accordingly.

Suppose we want to look at the RoA of Ashok Leyland of last year. In the Fundamental tab of Ashok Leyland, click on the fundamentals tab, we will get Ratios tab.  Then in the Ratios tab click on Return Ratios, and we get the RoA in miniscule of a second.

Bottomline

Return on Assets is an important barometer to gauge the growth and future prospects of a company. With the help, these ready-made parameters you can with the click of a button understand the strength of a company.  These parameters are freely available in every stocks under StockEdge app. So, what are you still thinking ? if you still do not have the StockEdge app, download it right now to use this free feature.

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