Question

How is the formula for return on assets calculated? Provide an example. Why is this calculation useful, and what does it tell you about the financial health of a company? What are poor results for this calculation, and what would that indicate about the company? How could the underlying issues be addressed?

Answer 1

Return on Assets refers to the he amount that a company has earned as a percentage compared with total assets.

Formula = (Net income/Average total assets)*100

Eg- ABC Pvt Ltd has earned 20000 profit in the current period and its average assets amounts to 100000. Hence, ROA is

= (20000/100000)*100

=20%

- It calculation is very important as it tells the investors about the profit making intensity of the company. After having such analysis, the investors can easily compare the best company in which the money must be invested. Also, ROA above 5% is considered to be the best.

- A negative ROA implies poor condition of that company and if it occurs, then the company fails to prove its financial position to be strong.