Why ‘return On Assets’ Is Considered To Be Of So Much Value?

By Author: Arond Devit
Total Articles: 14
Comment this article

Our debt situations have been handled skillfully by the debt relief agencies and thus we can thank the debt management plans for pulling us out of our financial inabilities. However, when it comes to tackling one of the major financial decisions like investment options and parameters, they can hardly help us with it. Return on assets is one of the handfuls of most significant metrics every investor should know. It tells the investor how efficiently or inefficiently a company turns assets into net income or in short it implies at a glance how profitable the company is. We must know that companies take capital from investors and turn it into profits which are in turn returned to the investor in form or the other; and ROA measures how diligently the company does this process. Obviously, the more efficient a company is in converting assets (capital) into profits, the more attractive it will be to investors. In simple terms, companies that make more money for the owners are worth more than companies that don’t make as much money. ROA is made up of two components: net margin and asset turnover. ...
... When used together, these two metrics tell an important story.

Net margin is found by dividing net income by sales and reveals the percentage retained of each dollar in sales and company. Companies that wring lots of profit out of each dollar of sales have a big advantage, but it is not the final answer. The other component is asset turnover, which gives you an idea of how well a company does in producing sales from its assets. You find asset turnover by dividing sales by assets. Once you have net margin and asset turnover, multiply them together to determine ROA. You now have an idea how well a company can convert assets into profits. Companies with high ROA compared to their peers, are more efficient at using assets to generate profits. ROA shows that any company has two choices to improve efficiency. It can raise prices and create high margins or rapidly move assets through the company. It is important to compare companies in the same industries. Some industries traditionally have higher margins or asset turnover than other industries do. ROA is an important measure to use and understand, but its flaw is that the metric does not consider the effect of borrowed capital. ROA indicates the potential of any company and its future financial possibilities and growth prospects and also tell us how many dollars of earnings they derive from each dollar of assets they control.

It’s a useful number for comparing competing companies in the same industry. The number will vary widely across different industries. Return on assets gives an indication of the capital intensity of the company, which will depend on the industry; companies that require large initial investments will generally have lower return on assets. Thus analyzing the figures and suggestions provided by ROA should be an important action for all investors who would want to minimize the risks and maximize the returns on their investments.

Aronddevit is a Journalist who writes on various Debt settlement and bankruptcy related financial articles.Get to know more about the related topics from http://www.bestdebtcare.com