Return on Assets or "ROA"
Return on Assets (ROA) = Net Income x Net Revenue = Net Income
Net Revenue Total Assets Total Assets
ROA measures return on total assets; it also represents the net profit margin multiplied by asset turnover. Keep in mind that heavily depreciated buildings, large proportions of intangible assets, or seasonal fluctuations may affect the asset total at a given point in time and throw the ratio off. Substituting average total assets in the denominator may alleviate the effect of seasonal fluctuations.
You will generally find an inverse relationship between the two ratios comprising return on assets. A company with a low net profit margin will likely exhibit higher asset turnover and vice versa. For example, a large discount retailer charges low prices but sells in high volumes. An analyst may compare returns on assets among companies using different pricing strategies to learn which ones work best.
The ROA for Smith Heating and Cooling, Inc. is .02 or two percent. Compare this number to those of prior years and to returns on assets of other companies. Ask yourself whether the $14,000 net profit is typical or sustainable for this company.
Net Revenue Total Assets Total Assets
ROA measures return on total assets; it also represents the net profit margin multiplied by asset turnover. Keep in mind that heavily depreciated buildings, large proportions of intangible assets, or seasonal fluctuations may affect the asset total at a given point in time and throw the ratio off. Substituting average total assets in the denominator may alleviate the effect of seasonal fluctuations.
You will generally find an inverse relationship between the two ratios comprising return on assets. A company with a low net profit margin will likely exhibit higher asset turnover and vice versa. For example, a large discount retailer charges low prices but sells in high volumes. An analyst may compare returns on assets among companies using different pricing strategies to learn which ones work best.
The ROA for Smith Heating and Cooling, Inc. is .02 or two percent. Compare this number to those of prior years and to returns on assets of other companies. Ask yourself whether the $14,000 net profit is typical or sustainable for this company.
You are right that this ratio will not work for companies dependent on intangible assets. And, given that roughly 80% of the average companies corporate value is intangible, that applies to almost every business. It's ironic that there is so little information on intangibles because there is a clear cost basis for these assets, it is just washed through the income statement. While intangibles cannot be capitalized for a lot of reasons, companies should be reporting the costs and return associated with intangibles like competencies, processes, knowledge, relationships and brands.
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