ROA

Return on assets (ROA) is an index that shows ratio of profit to total assets in a company. In Japanese, it is called soushisan-rieki-ritsu.

Overview
Return on assets is an index that shows whether a company makes good use of its property to raise its profit. ROE, another index similar to return on assets, evaluates the profitability according to the relationship between the stockholders' equity and profits. On the other hand, return on assets is an index that evaluates the profitability from the relation between total assets, which is made up of stockholders' equity and liabilities, and profits.

When return on assets is large, it means that a company effectively generates revenue by making good use of its total assets, i.e. the company does not let its assets lie idle. Specifically, return on assets is calculated in the following expression:

Return on assets = Net Income / Total Assets

Resolution
The return on assets, shown in the expression above, can also be resolved into two elements as is in the following expression: Return on assets = (profit/sales) * (sales/total assets) First term signifies rate of profit of a company or profitability of its activity. Second term signifies turnover of assets, and efficiency of capital of a company.

High profitability indicates that the company generates a lot of additional values, and high efficiency means that the company makes a good use of its capital.

Usage
Return on assets is an index that shows activity status of a company to its stockholders/investors, and importance of return on assets increases The more direct finance as a fund-raising means increases in the future, the more return on assets will become important. Return on assets is appropriate for comparing efficiency of companies in the same industry. It is necessary to resolve (to drill down), as seen above, and to specify what results in increase/decrease of return on assets, as well as to solve problems if there are any. For instance, you design an efficient Business Process by executing BPM, and improve to produce additional value by eliminating any wastes; profitability is expected to increase.

Return on Assets from the Viewpoint of Financial Accounting
Return on assets is also called Total assets operating profit rate, Total assets net income rate, or Total assets gross profit rate, according to what the profits are used for.

Total assets operating profit rate = operating profit rate / total assets Total assets net income rate = net income / total assets Total assets gross profit rate = gross profit / total assets

Related Articles

 * ROI
 * ROE