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The ROA (Return on Assets) ratio reflects the ratio of a company's net profit to its assets and is expressed as a percentage.
ROA allows investors to evaluate how efficiently a company is using its assets.
It's obvious that the higher this indicator , all the better the company's return on assets.
Formula for calculating ROA (Return on Assets)
ROA is calculated using the following formula:
$$ ROA = (Net Profit \over Assets) * 100 \% $$
ROA formula for reporting in English:
$$ ROA = ( Net Income \over Total Assets ) * 100 \% $$
Where Net profit- the company’s total net profit for the year (must be annualized for quarterly reports).
How to use the ROA (Return on Assets) coefficient
Return on assets is useful to use in the following cases:
- When comparing companies in the same industry based on ROA
- When analyzing the dynamics of changes in ROA within one company
It makes no sense to compare companies from different industries based on ROA, since the specifics of the business and its profitability, depending on the industry, can vary greatly.
Features of the ROA (Return on Assets) indicator
Unlike the return on equity indicator, the ROA (Return on Assets) calculation involves all the company’s assets, which include not only equity capital, but also borrowed funds.
This implies the relationship between indicators and ROA:
The more leverage a company has, the greater the difference between performance and ROA.
As leverage increases, ROA will decrease.
ROA (Return on Assets) indicator on FinanceMarker
In the new version of FinanceMarker.ru, the ROA indicator will be available for all companies of the Moscow Exchange, as well as the NASDAQ, NYSE and other exchanges.
The indicator will be available for:
- Comparisons of companies with each other based on ROA indicator within the framework of the summary table of multipliers.
- Analysis of changes in ROA within one company.
Return on Asset ROA data will be available on
FinanceMarker.ru in both tabular and graphical form.
How to evaluate how correctly and effectively a company uses its capabilities? How can you even value a company in order to sell it or attract investors? For a competent analysis, relative and absolute indicators are used, which allow one to draw conclusions not only about the monetary value, but also about the prospects for purchasing/investing in the project. One of these indicators is return on assets, the calculation formula for which will be given below. In our article you will learn about what this term means, when it is used and what it shows.
Introduction
To correctly assess economic activity, it is necessary to combine relative and absolute indicators. The first talk about how profitable and liquid the company is, whether it has prospects and chances to remain on the market during crises. It is by relative indicators that two companies operating in the same fields are compared.
Return on assets shows the efficiency of your property
Absolute indicators are numerical/monetary values. This includes profit, revenue, product sales volumes and other values. A correct assessment of an enterprise is possible only by comparing two indicators.
What is RA
The term “return on assets” sounds in English as return on assets and has the abbreviation ROA. Knowing it, you can understand how effectively the company uses its existing assets. This is a very important indicator that allows you to conduct a global analysis of your company’s economic activities. That is, to put it simply, return on assets is the efficiency of your property.
Currently, three types of ROA are used:
- Classic return on assets (ROA).
- Profitability of existing current assets.
- Profitability of existing non-current assets.
Let's look at these concepts. Current assets describe the company's existing assets, which are indicated in the balance sheet (section number 1), as well as in lines 1210, 1230 and 1250. This property must be used for a production cycle or one calendar year. These assets influence the cost of a company's final service or manufactured product. This usually includes:
- Existing accounts receivable.
- Value added tax.
- Working capital “frozen” in warehouses and production.
- Currency and other equivalents.
- Various short-term loans.
The higher the return on assets, the more profit the company makes
Experts divide OO into three types:
- Cash (loans, short-term investments, VAT, etc.).
- Material: raw materials, workpieces, supplies.
- Intangible: receivables and equivalents.
The second, no less important concept is the non-current assets of the enterprise. This term includes all property that has been in use for more than a year and is displayed in lines 1150 and 1170. These assets do not lose their properties over a long period of time (but are subject to depreciation), therefore they add only a small part to the cost of the final service or product. This term includes:
- key property of the company (office and industrial buildings, transport, equipment, machines);
- classic intangible assets (reputation, brand, licenses, existing patents, etc.);
- existing long-term loans and liabilities.
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These assets are also divided into three types, like current ones.
How to calculate
In order to find out the return on assets ratio, you can use the formula (PR/ASR)*100%. The formula may also look like this: (PE/Asp)*100%. By taking profit data and calculating the corresponding values, you will find out how much money each ruble invested in the company’s property brings in and whether the assets can generate profit at all.
A high return on assets ratio is usually observed in trading and innovative enterprises
To find how much profit your assets are generating, you can use the TR-TC formula. Here TR stands for cost revenue and TC stands for cost of the product/service. To find TR, use the formula P*Q, where Q is sales volume and P is the cost of one product.
To find the cost, you need to find data on all the costs of the enterprise for a production cycle or a certain time and add them up. Costs include rent, utilities, salary for workers and management, depreciation, logistics, security, etc. Knowing the cost, you can calculate the net profit: TR-TC-PrR+PrD-N. Here N stands for taxes, PrR stands for other expenses, PrD stands for other income. PrD and PrR are terms that denote income and expenses that are not directly related to the company’s activities.
We count according to the balance
There is a special formula for return on assets on the balance sheet - it is usually used if the data is completely open . The balance sheet indicates the number and value of assets at the beginning and end of the year. You can find out profitability quite simply - calculate the arithmetic average for each section of the balance sheet from lines 190 and 290. This way you will find out the cost of non-current and current assets. In small companies, the calculation is done on lines 1150 and 1170, as a result you will find out the average annual cost of VnA.
Then we use the formula ObAsp = ObAnp + ObAkp. Here everything is the same as in the previous formula, and ObA denotes the value of current assets. Now we add the two resulting numbers and get the average annual value of the company’s property. This is done using the formula Asp = ObAsp + InnAsr.
Return on assets is a relative indicator that can be used to compare businesses
Based on this, we can conclude: return on assets shows the return on your company’s assets. The higher this ratio, the higher the profit and the lower the costs. That is why you need to strive to make your property more profitable, and not a hanging dead weight and devouring your existing reserves.
The return on assets formula shows the approximate value of the efficiency indicator of the entire organization (company) as a whole. A high profitability indicator indicates the financial well-being of the company and its competitiveness.
The formula for calculating profitability is different for each category of assets. The amounts for calculation are taken from the corresponding section and line of the balance sheet.
An increasing level of value indicates a positive trend in the development and overall activities of the organization. A decrease in value may indicate a decrease in the company’s turnover capacity and.
Return on assets
ROA or return on assets shows the relative level of economic efficiency of a company. The coefficient reflects the ratio of profit to the funds that formed it. The data for the calculation is taken from the balance sheet going to.
The value is relative and is usually reflected as a percentage.
ROA reflects the level of efficiency in using the company's (enterprise) property and the degree of qualified management.
It is applied for:
- reporting of cash investments;
- characteristics of the degree of income from existing cash investments and the efficiency of use of property;
- displaying the functionality of accountants' work;
- establishing the exact level of profitability in each group of assets separately available in the organization.
Through calculation, it is possible to actually analyze the degree of profitability of a company, regardless of its turnover.
The ratio reflects the financial position of the company, its ability to repay loans, competitiveness, and its investment attractiveness (quantity).
Profitability indicators are:
- Total
- Negotiable
- Non-negotiable
Increase and decrease value
An increase in the value of profitability is most often associated with an increase in the level of net income of the enterprise, with an increase in the cost of goods (services), as well as with a reduction in costs for manufactured products or services provided, with increased turnover.
A decrease in value is an indicator of a decrease in net profit received, with an increase in the value of current and non-current amounts, and decreased turnover.
Formulas for calculus
The general formula for calculating the coefficient is calculated by dividing the enterprise's income for the calculated period of time by general cost indicators.
The percentage of contributions and tax rate are added to the net financial income indicator.
The resulting amount should be divided by the product. assets and multiply by 100%. To this amount of calculated income is added the interest that was taken away, including. Loan payments should be classified as gross waste.
Important: economic rent. Act. calculated using a formula without % payments to identify the company’s net profit.
This calculation is made because financial investment in a company is made in two ways: through the company’s cash supply and money received through a loan. But in the formation of capital, the type of receipt of financial components does not matter.
Balance calculation
For non-current property
The company has been using non-current assets for more than 1 year. This property (fixed assets, long-term financial investments, intangible assets, etc.) is reflected in the first section of the accounting. balance.
For calculation, the denominator indicates the total in the first section - line 1100 - this is the profitability indicator.
To analyze the profitability of indicators of other types, the denominator indicates the amount that is displayed in the balance sheet in the corresponding line.
Advice! The simplest option for calculating average profitability is to add the sum of the indicators at the beginning and end of the year and divide by 2.
For calculation purposes, the numerator indicates the amounts from the financial statements (form No. 2):
- line 2200 - profit from sales;
- line 2400 - net profit.
For current assets
The concept of calculating this type of profitability is identical to the previous one. The numerator in the formula will display the amount of income from the financial report, the denominator will be the value of the average cost of working capital. For calculation, the total amount for the balance from section 2 of line 1200 is set.
The calculation of a separate type will be made based on the amount from the corresponding line 2 of section.
ROA indicator
ROA involves the calculation of all funds of the organization, and not just independent funds. The components of the funds of the entire enterprise will be not only existing financial flows, but also loan obligations and capital.
The higher the indicator, the more financial profit the company receives, with a relatively small degree of capital investment.
The main task of the company's management is the constructive investment of the organization's financial resources. The ROA calculation allows you to determine whether an enterprise can be a profitable lever for generating profit with relatively small investments.
RONA ratio
RONA is a measure of the return on net assets ratio. Through calculation, it is possible to establish the correct use of invested capital and the receipt of large income from the invested funds by its owners.
Net assets are the total cost unit (the value of property), excluding amounts for the payment of any debts. Or, in other words, this is the profitability ratio of current and non-current financial assets.
All company owners are interested in increasing this value. Net profit directly indicates the feasibility of investing capital in a given organization, and also shows the value of dividend payments and is reflected in the total cost.
The RONA calculation is similar to the ROA calculation. There is a slight difference - the institution’s capital expenses should not be taken into account. This ratio is an indicator of the degree of performance in the financial market.
RONA shows financial group managers that there is an investment in acquiring and maintaining the property. The basis for calculation is annual profit after payment of all taxes.
Why does an accountant need to calculate ROA?
It is believed that calculating the ROA coefficient is most often necessary for a material group of organization analysts who evaluate the work done to maintain the effectiveness of business development (search for growth reserves).
But for an accountant and tax specialists of an enterprise, this value is also of no small importance. Because assessing the profitability of a company and calculating the ROA indicator may become one of the reasons for inspections by tax inspectors.
Really large deviations in profitability, amounting to more than 10% from the industry average, are a reason to come under the control of the tax authorities.
Profit is the main thing. Of course, there are people who disagree with this. Some argue that liquidity and cash flow are more important (and too often ignored). But no one will deny that it is necessary to monitor a company's profitability to ensure its financial health.
There are several ratios that you can look at to assess whether your company can generate revenue and control its expenses.
Let's start with return on assets.
What is return on assets (ROA)?
In the broadest sense, ROA is the ultra version of ROI.. Return on assets tells you what percentage of each dollar invested in the business was returned to you as profit.
You take everything you use in your business to make a profit - any assets such as cash, fixtures, machinery, equipment, vehicles, inventory, etc. - and compare it all to what you were doing during that period in terms of profit.
ROA simply shows how effectively your company uses its assets to generate profits.
Take the infamous Enron. This energy company had a very high ROA. This was due to the fact that she created separate companies and “sold” her assets to them. Since its assets were thus taken off the balance sheet, the company appeared to have a higher return on assets and equity. This technique is called "denominator control".
But "denominator management" is not always a scam. In fact, it's a smart way to think about how to run a business.
How can we reduce assets so that we can increase our ROA?
You're essentially figuring out how to do the same job at a lower cost. You may be able to restore it instead of throwing away money on new equipment. It may be a little slower or less efficient, but you will have lower assets.
Now let's look at return on equity.
What is return on equity (ROE, from the English. Return on Equity)?
Return on equity is a similar ratio, but it looks at equity, the net worth of a company as measured by accounting rules. This metric tells you what percentage of profit you are making for each dollar of capital invested in your company.
This is an important ratio no matter what industry you're in, and is more relevant than ROA for some companies.
Banks, for example, receive as many deposits as possible and then lend them out at a higher interest rate. Typically, their return on assets is so minimal that it is truly unrelated to how they make money.
But every company has its own capital.
How to calculate return on equity?
Like ROA, this is a simple calculation.
net profit/equity = return on equity
Here's an example similar to the one above, where your profit for the year is $248 and your equity is $2,457.
$ 248 / $ 2,457 = 10,1%
Again, you may be wondering, is this a good thing? Unlike ROA, you want ROE to be as high as possible, but there are limits.
This can be explained by the fact that one company may have a higher ROE than another company because it has borrowed more money and therefore has more debt and proportionately less investment put into the company. Whether this is a positive or negative factor depends on how wisely the first company uses its borrowed money.
How do companies use ROA and ROE?
Most companies look at ROA and ROE in conjunction with various other profitability measures such as gross profit or net profit. Together, these numbers give you an overall idea of the company's health, especially compared to its competitors.
The numbers themselves aren't that useful, but you can compare them to other industry results or to your own results over time. This trend analysis will tell you which direction your company's financial health is heading.
Often investors care about these ratios more than managers within companies. They look at them to determine whether they should invest in the company. This is a good indicator of whether the company can generate profits that are worth investing in. Likewise, banks will look at these figures to decide whether to lend to the business.
Managers in some industries find ROA more useful in decision making. Since this indicator reflects the profit generated from the main activity, it can be used by industrial or manufacturing companies to measure efficiency.
For example, a construction company might compare its ROA to its competitors and see that its rival has a better ROA, even though its profits are high. This is often the decisive push for these companies.
Once you have figured out how to make more profit, you figure out how to do it with fewer assets.
ROE, on the other hand, is more relevant to the board of directors than to the manager, which has little influence on how much stock and debt the company has.
What mistakes do people make when using ROA and ROE?
The first caveat is to remember that none of these numbers are completely objective. Sales are subject to revenue recognition rules. Costs are often a matter of estimation, if not guesswork. Assumptions are built into both the numerator and denominator of the formulas.
Thus, earnings reported on the income statement are a matter of financial art, and any ratio based on these figures will reflect all of these estimates and assumptions. The ratio is still useful, just remember that estimates and assumptions will always change.
Another problem is that you are using a number obtained over a certain period of time (last year's profit) and comparing it with a number at a certain point in time (assets or capital). It's usually wise to take an average of assets or stocks so that "you're not comparing apples and oranges."
With ROE, you also have to remember that equity is book value. The true cost of capital is the market capitalization of the company's shares. When you interpret this figure, keep in mind that you are looking at book value, and market value may be different.
The risk is that since book value is typically lower than market value, you may think you're getting a 10% ROE when investors think your return is much less.
You probably won't make an investment decision based on just one of these numbers, or even both of them. They are part of a larger group of indicators that help you understand the overall health of your business and how you can influence it.
