Profitability Ratio: Return on Assets

June 8th, 2006 Comments off
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Another type of profitability ratio for assessing the profitability of a company is:

The RETURN ON TOTAL ASSETS (ROA % )

FORMULA

Net Profit After Taxes / Total Assets

MEASURE WHAT

Indicates how well assets are used to create wealth, regardless of capital structure. Profitability of operations management

SCORE OR VALUE

Depends on industry

10-15% is reasonable Depends on industry

SALIENT POINTS TO NOTE:

1.Add back interest expenses back into net income when performing this calculation so as to ignore financing and focuses on operations

2  Affected by assets valuation and mix

3.Can be broken into more useful details-asset turnover & profit margin using a Dupont framework

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Financial Accounting

 
 

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