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.