Financial modelling terms explained

Return On Assets

The return on assets ratio is a financial ratio that measures the profit generated from total assets. It is useful for comparing the productivity of a firm's assets and is expressed as a percentage

What Is Return On Assets?

Return on assets (ROA) is a financial ratio that measures a company's profitability by dividing its net income by its total assets. ROA is used to assess a company's efficiency in using its assets to generate income.

How Do You Calculate Return On Assets?

The calculation for return on assets is:

Return on assets = net income / average total assets

This calculation will give you the percentage of net income generated by the use of average total assets. This is a key financial metric used to measure the effectiveness of a company's management in deploying its assets.

Who Uses Return On Assets?

The use of return on assets can be seen in a variety of different industries and businesses. Some of the most common users of this metric are banks, as they use it to measure the profitability of their lending and investment portfolios. Manufacturers also use it to measure the efficiency of their operations, as well as to make decisions about where to allocate their capital. In the world of investing, mutual funds and hedge funds use return on assets to measure the performance of their portfolios and to decide which investments to make. Finally, individual investors also use this metric to evaluate the potential profitability of individual stocks.

What Do You Have to Watch out for When You're Performing Return On Assets?

There are a few things to watch out for when performing return on assets (ROA) calculations. One is that the denominator (assets) must be net of any intangible assets, such as goodwill. Another is that the calculation should only include operating income (or earnings before interest and taxes, EBIT), not total income. This is because interest and taxes are not indicative of the company's ability to generate profits from its assets. Finally, the calculation should be performed on a per-share basis, in order to account for any dilution that may have occurred as a result of issuing new shares.

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