How to Measure Return on Assets
Identify the average total assets owned by the company during the time period under consideration., Determine the total amount of net income generated by the business during the specified time period., Divide the net income by the average total...
Step-by-Step Guide
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Step 1: Identify the average total assets owned by the company during the time period under consideration.
This is important, since knowing this figure makes it possible to understand what resources are available to aid in generating revenues within any given time period. -
Step 2: Determine the total amount of net income generated by the business during the specified time period.
Net income is calculated by subtracting operational expenses from the gross income that is received during that period.
This figure effectively helps you understand how much was left after all essential expenses due for that period were settled.
Make sure you know which expenses the company deducts from the gross income to come up with the net income figure for the period, since the process is not uniform from one company to the next. , This will result in a figure that is represented as a percentage and gives some idea of whether or not the level of returns is worth the expenses involved.
A negative ROA indicates that resources are not being managed well and changes must be made in order to prevent the business from becoming unprofitable.
A positive ROA indicates that the management of available resources is at least adequate, although there may still be room for improvement in how those resources are used. , This will provide some perspective into how well the company is managing its resources compared to similar companies in the same industry.
Doing so can often make it easier to determine if selling the shares and investing in a competitor would produce greater profits or returns from the stocks, or if holding on to the shares is a more viable approach. -
Step 3: Divide the net income by the average total assets.
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Step 4: Compare the return on assets to industry standards.
Detailed Guide
This is important, since knowing this figure makes it possible to understand what resources are available to aid in generating revenues within any given time period.
Net income is calculated by subtracting operational expenses from the gross income that is received during that period.
This figure effectively helps you understand how much was left after all essential expenses due for that period were settled.
Make sure you know which expenses the company deducts from the gross income to come up with the net income figure for the period, since the process is not uniform from one company to the next. , This will result in a figure that is represented as a percentage and gives some idea of whether or not the level of returns is worth the expenses involved.
A negative ROA indicates that resources are not being managed well and changes must be made in order to prevent the business from becoming unprofitable.
A positive ROA indicates that the management of available resources is at least adequate, although there may still be room for improvement in how those resources are used. , This will provide some perspective into how well the company is managing its resources compared to similar companies in the same industry.
Doing so can often make it easier to determine if selling the shares and investing in a competitor would produce greater profits or returns from the stocks, or if holding on to the shares is a more viable approach.
About the Author
Marilyn Long
Marilyn Long is an experienced writer with over 23 years of expertise in lifestyle and practical guides. Passionate about sharing practical knowledge, Marilyn creates easy-to-follow guides that help readers achieve their goals.
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