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Use ROA To Gauge A Company's Profits

2012-03-08 13:04:57

Sure, it's interesting to know the size of a company. But ranking companies by the size of their assets is rather meaningless, unless one knows how well those assets are put to work for investors. As the name implies, return on assets (ROA) gauges how efficiently a company can squeeze profit from its assets, regardless of size. A high ROA is a telltale sign of solid financial and operational performance. (Read more, in ROA And ROE Give Clear Picture Of Corporate Health.)

Calculating ROA

The simplest way to determine ROA is to take net income reported for a period and divide that by total assets. To get total assets, calculate the average of the beginning and ending asset values for the same time period.

ROA = Net Income/Total Assets

Some analysts take earnings before interest and taxation, and divide over total assets:

ROA = EBIT/Total Assets

This is a pure measure of the efficiency of a company in generating returns from its assets, without being affected by management financing decisions.