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Return on assets ratio ROA (Return on Assets) 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 return on assets of the company.
Formula for calculating ROA (Return on Assets)
ROA is calculated using the following formula:
$$ ROA = ( Net Income \over Assets ) * 100 \% $$
ROA formula for reporting in English:
$$ROA = ( Net Income \over Total Assets ) * 100 \% $$
Where Net profit- the total net profit of the company for the year (for quarterly reports it must be recalculated for the year).
How to use the ROA (Return on Assets) ratio
Return on assets is useful in the following cases:
- When comparing companies in the same industry in terms of ROA
- When analyzing the dynamics of changes in the ROA indicator within one company
It makes no sense to compare companies from different industries in terms of ROA, since the specifics of a business and its profitability, depending on the industry, can vary greatly.
Features of the return on assets indicator ROA (Return on Assets)
Unlike the return on equity indicator, the calculation of ROA (Return on Assets) involves all the assets of the company, which include not only equity, but also borrowed funds.
This implies the relationship between indicators and ROA:
The more leveraged a company is, the greater the difference between performance and ROA.
With an increase in borrowed funds, the ROA will decrease.
ROA (Return on Assets) 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:
- Comparison of companies with each other in terms of ROA within the framework of the summary table of multipliers.
- Analysis of changes in the ROA indicator within one company.
ROA data will be available at
FinanceMarker.ru in both tabular and graphical form.
How to assess how correctly and effectively the company uses its capabilities? How can one evaluate an enterprise in order to sell it or attract investors? For a competent analysis, relative and absolute indicators are used, which allow drawing conclusions not only about the monetary value, but also about the prospects for buying / investing in a project. One of these indicators is the return on assets, the formula for calculating 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
For a competent assessment of economic activity, it is necessary to combine relative and absolute indicators. The former talk about how profitable and liquid the company is, whether it has prospects and chances to stay on the market during crises. It is by relative indicators that two companies operating in the same areas are compared.
Return on assets shows the performance of your property
Absolute indicators are numerical/monetary values. This includes profit, revenue, product sales and other values. A correct assessment of the 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 efficiently the company uses its assets. This is a very important indicator that allows you to conduct a global analysis of the economic activities of your company. That is, to put it simply, return on assets is the efficiency of your property.
Three types of ROA are currently in use:
- Classic return on assets (ROA).
- Profitability of existing current assets.
- Profitability of existing non-current assets.
Let's take a 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 the production cycle or one calendar year. These assets affect the cost of the final service or manufactured products of companies. This usually includes:
- Existing accounts receivable.
- Value Added Tax.
- Working capital “frozen” in warehouses and production.
- Foreign currency and other equivalents.
- Various short term loans.
The higher the return on assets, the more profit the company brings
Specialists divide OO into three types:
- Cash (loans, short-term investments, VAT, etc.).
- Material: raw materials, blanks, stocks.
- Intangible: receivables and equivalents.
The second, no less important concept, is the non-current assets of the enterprise. This term includes all property that is used for more than a year and is displayed in 1150 and 1170 lines. 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, machine tools);
- 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, as well as current assets.
How to calculate
In order to find out the profitability ratio of assets, you can use the formula (PR / Asr) * 100%. Also, the formula may look like this: (PE / Asr) * 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 assets can even make a profit.
A high rate of return on assets is usually observed in trading and innovative enterprises
In order to find how much profit your assets bring, you can use the TR-TC formula. Here, TR stands for Value Revenue and TC stands for Product/Service Cost. To find TR, use the formula P * Q, where Q is the 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 the production cycle or a certain time and add them up. The costs include rent, utilities, wages for workers and management, depreciation, logistics, security, etc. Knowing the cost, you can calculate the net profit: TR-TC-PrR + PrD-N. Here H - denotes taxes, PrR - other expenses, PrD - other income. PrD and PrP are terms that denote income and expenses that are not directly related to the company's activities.
Count by 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 the profitability quite simply - calculate the arithmetic average for each section of the balance sheet from lines 190 and 290. This is how you 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 I.A.
Then we use the formula ObAsr = ObAnp + ObAkp. Here everything is the same as in the previous formula, and OA denotes the value of current assets. Now we add the two received numbers and get the average annual value of the company's property. This is done according to the formula Asr = ObAsr + VnAsr.
Return on assets is a relative measure that can be used to compare businesses
Based on this, we can conclude: return on assets shows the return on the property of your company. 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 hanging dead weight and devouring available reserves.
The return on assets formula shows the approximate value of the performance 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 for each category of assets is different. The amounts for calculation are taken from the relevant section and line of the balance sheet.
An increasing level of significance indicates a positive trend in the development and all activities of the organization. A decrease in the value may indicate a decrease in the turnover of the company and.
Return on assets
ROA or return on assets shows the relative level of economic efficiency of the 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 expressed as a percentage.
ROA reflects the level of efficiency in the use of the property of the company (enterprise), the degree of qualified management.
It is applied for:
- financial investment reporting;
- characteristics of the degree of income from existing cash investments and the effectiveness of the use of property;
- displaying the functionality of the work of accountants;
- establishing the exact level of profitability in each group of assets separately available in the organization.
Through calculation, it is realistic to analyze the degree of profitability of the company, regardless of its turnover.
The coefficient reflects the financial position of the company, its solvency to pay loans, competitiveness, its investment attractiveness (quantity).
Profitability indicators are:
- Total
- negotiable
- Non-current
Increase and decrease value
The 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 products or services provided, with increased turnover.
A decrease in the value is an indicator of a decrease in the net profit received, with an increase in the cost of current, non-current amounts, reduced turnover.
Formulas for Calculus
The general calculation formula in the coefficient is calculated by dividing the income of the enterprise for the calculated period of time by the total cost indicators.
The percentage of contributions and the tax rate are added to the indicator of net financial income.
The resulting amount should be divided by assets and multiply by 100%. To this amount of calculated income are added the interest that was taken away, including. Loan repayments should be treated as gross disbursements.
Important: economic rent. Act. calculated by the formula without % payments, to reveal the net profit of the company.
This calculation is made because the financial investment in the company is made in two ways: at the expense of the company's money supply and money received through a loan. And in the formation of capital, the type of receipt of financial components does not matter.
Balance calculation
For non-current property
The company uses 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 an indicator of profitability.
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 easiest way to calculate the average profitability is to add the sums of the indicators for the beginning and end of the year and divide by 2.
For calculation, the numerator indicates the amounts from the financial statements (form No. 2):
- line 2200 - profit from sales;
- line 2400 - net profit.
For current property
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 amount of the balance total from the 2nd section of line 1200 is set.
The calculation of a separate type will be made on the basis of the amount from the corresponding line of section 2.
ROA
ROA involves the calculation of all the funds of the organization, and not just independent funds. The components of the funds of the entire enterprise will be not only the available financial flows, but also the obligations for loans and capital.
The higher the indicator, the more the company receives financial profit, with a relatively small degree of investment.
The main task of the company's management is a constructive investment of financial resources of the organization. Calculating ROA allows you to determine whether the company can be a cost-effective lever for profit, with a relatively small investment.
RONA coefficient
RONA is a measure of the return on net assets. By calculation, it is possible to establish the correctness of the use of the invested capital and the receipt of a large income from the invested funds by its owners.
Net assets are the total cost unit (property value), not including any debt repayments. Or, in other words, it is the profitability ratio of current and non-current financial assets.
All owners of the company are interested in increasing this value. Net profit directly indicates the feasibility of investing capital in this 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 capital costs of the institution should not be taken into account. This ratio is an indicator of the degree of performance in the financial market.
RONA shows the managers of the financial group that there is an investment in the acquisition and maintenance of property. The basis for the calculation is the annual profit, after payment of all taxes.
Why should an accountant calculate ROA
It is believed that it is most often necessary to calculate the ROA coefficient 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 the accountant and tax specialists of the enterprise, this value also plays an important role. Because the assessment of the company's profitability and the calculation of the ROA indicator can be one of the reasons for inspections by tax inspectors.
Really large deviations in profitability, in the amount of more than 10% of the industry average, is a reason to fall 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 overlooked). But no one will deny that it is necessary to control the profitability of a company in order to ensure its financial health.
There are several ratios by which you can evaluate whether your company can generate revenue and control its costs.
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 every dollar invested in a business has been returned to you as profit.
You take everything you use in your business to make a profit - any assets like money, fixtures, machinery, equipment, vehicles, inventory, etc. - and compare it all to what you were doing during that period in terms of profit.
ROA simply measures how efficiently your company is using its assets to generate profit.
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 approach is called "denominator control".
But "managing the denominator" 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 we can increase our ROA?
You are essentially figuring out how to do the same job for less. You might be able to rebuild it instead of throwing money away at new hardware. It may be slightly 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 company's net worth as measured by accounting rules. This metric tells you what percentage of profit you make for every dollar of capital invested in your company.
This is an important ratio no matter what industry you're in, and more relevant than ROA for some companies.
Banks, for example, take in as many deposits as possible and then lend them out at higher interest rates. Typically, their ROA is so minimal that it really doesn't relate 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 income / equity = return on equity
Here is an example similar to the one above, where your annual profit is $248 and your capital is $2,457.
$ 248 / $ 2,457 = 10,1%
Again, you may wonder if this is a good thing? Unlike ROA, you want the 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 in 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 measures of profitability such as gross margin or net income. Together, these numbers give you a general idea of the company's health, especially when compared to its competitors.
The numbers on their own aren't that useful, but you can compare them to other results in the industry or to your own results over time. This trend analysis will tell you which direction your company's financial health is headed.
Often investors care more about these ratios than managers within companies. They look at them to determine if they should invest in a company. This is a good indicator of whether a company can generate profits that are worth investing in. Likewise, banks will look at these numbers to decide whether to lend to businesses.
Managers in some industries find ROA more useful in decision making. Since this indicator reflects the profit generated by the main activity, it can be used by industrial or manufacturing companies to measure efficiency.
For example, a construction company can compare its ROA with its competitors and see that the competitor has the best ROA even though the profit margin is high. Often for these companies, this becomes a decisive impetus.
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, who has little influence on how much stock and debt a 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. The sales are subject to revenue recognition rules. Costs are often a matter of estimation, to say the least. Assumptions are built into both the numerator and denominator of formulas.
As such, income reported on the income statement is a piece of financial art, and any ratio based on these numbers 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 generated over a certain period of time (last year's earnings) and comparing it to a number at a certain point in time (assets or capital). It's usually wise to take average 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, remember that you are looking at book value and market value may be different.
The risk is that since book value is usually below market value, you may think you are getting a 10% ROE while 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 large group of indicators that help you understand the overall health of the business and how you can influence it.
