One way to measure a company\u2019s efficiency is to calculate its Return on Assets or ROA. As you know, assets on the balance sheet are essentially proceeds of or means to make business. They are the resources a company has in its possession to use according to its management best judgment. <\/p>\n
ROA is an indicator of how profitable the company is in relation to its total assets (including both current and non-current assets as of the balance sheet date). Essentially ROA shows how efficiently the management uses the resources available for them to generate profit. Consequently, ROA is calculated as follows: annual earnings (net profit) are divided by total assets. The end result is displayed in percentage thus showing how profitable the assets of the company are.
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\nWhen measuring ROA, the higher the number the better since it means the company is earning more money on less investments. For an example, we have company A and B. Company A earned 100,000 with 5,000,000 worth of assets thus making the ROA 2%. Company B has the same amount of assets, but made 1,000,000 of profit resulting in ROA of 20%. Looking at our example, it is obvious that the company B is better managed since it converts its investments into bigger profit than company A. <\/p>\n
As always, when comparing ratios and on this case ROA of different companies, they may differ significantly due to industry sectors the companies are in. To get the most objective and fair comparison, it is best to look at ROAs within same business sector or of the same company but different periods. <\/p>\n","protected":false},"excerpt":{"rendered":"
One way to measure a company\u2019s efficiency is to calculate its Return on Assets or ROA. As you know, assets on the balance sheet are essentially proceeds of or means to make business. They are the resources a company has in its possession to use according to its management best judgment. ROA is an indicator […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[28,47],"tags":[],"class_list":["post-2142","post","type-post","status-publish","format-standard","hentry","category-4-reporting","category-4-2-financial-ratios"],"aioseo_notices":[],"aioseo_head":"\n\t\t\n\t\n\t\n\t\n\t\n\t\n\t\t