![]() ![]() Myriad textbooks and other financial publications improperly define ROA as net income (sometimes pre-tax income) divided by total assets. When depreciation expense is not a close approximation of routine capital expenditures ( e.g., store operating leases of retailers, where no depreciation expense is recognized but maintenance of the property is often the responsibility of the tenant), the analyst may prefer to estimate the portion of historical capital expenditures that were non-growth related outlays, and deduct this estimate from EBITDA (earnings before interest, taxes, depreciation and amortization). EBIT is generally the preferred measure of operating profit provided that depreciation expense (which has already been deducted from EBIT) is a fair proxy of maintenance-type capital expenditures. The first ratio, total asset turnover, is a measure of a firm's productivity, i.e., how much revenue does one dollar of assets generate? The second ratio, operating margin, is a measure of a firm's profitability, i.e., what percentage of these revenue dollars remains as operating profits? Putting the two ratios together-which can be done algebraically by canceling out the sales terms-provides an easily calculable, high-level summary measure of operating performance. Total Assets) * (Four-quarter EBIT/Four-quarter Sales) ROA is in fact the product of two other ratios: total asset turnover and operating margin, calculated as follows: (Four-quarter Sales/Avg. For companies attempting to reorganize through the bankruptcy process, ROA can serve as a gauge of reasonableness of the debtor's business plan and its underlying assumptions, but presents some unique pitfalls as well. For distressed companies, ROA is a high-level diagnostic tool that helps identify areas of underperformance. It can be employed as a historical time-series for a firm and its operating segments, or as a benchmark measure of operating performance for a group of competing companies. ![]() When properly defined and analyzed, ROA-which we define here as trailing four-quarter operating profit (earnings before interest expense and incomes taxes, or EBIT) divided by average total assets-is a key measure of relative operating performance. Make sure to check out our time value of money calculator first because cost opportunity is one of the core topics in investing.Perhaps no financial ratio is as frequently cited and misunderstood as return on assets (ROA). If you own a business, we wish you good luck and the highest ROA ratio! :) If you are an investor, we suggest you keep reading. We hope that this article has helped you to find answers to your questions about ROA. It is also very important to look back into the history of a company's ROA, as even a very good value does not have to mean long-term profitability for the company. Therefore, we can talk about a good return on assets when it is about 10-15%. It is excellent when it reaches several dozen percent, but it is very hard to get to this level and retain such a value for an extended time period. The rule is simple: the higher the ROA, the better the financial condition of your company. You already know what is the return on assets and how to calculate it, so it's high time you asked: what is a good return on assets? Here's the answer! ROA, similarly to, for example, ROE, should be as high as possible. maybe you have some ideas already? Go to the next section to find out whether you're right. Note that we have two absolutely different situations and you probably wonder which is better for the company. You can also input those values in our return on assets calculator. ![]() Now let's consider two examples with two totally different ROA ratios. To make it all clear, here you have the exact formula used by our ROA calculator: Once you've done this, the only thing you have to remember about it is to multiply the result by 100%, as ROA is always expressed as a percentage. The next step is to divide the first one by the second. You need the two variables which we have discussed above: net profit and total assets. As you already know that ROA is the relationship between net profit and total assets value, the derivation of the formula is very simple. ![]()
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