Video:What Is Return on Assets?

SHARE ON                

Transcript:What Is Return on Assets?

What Does a Return on Assets Tell an Investor?

Return on assets, or ROA for short, tells an investor how much profit a company generated for each $1 in assets.

What Else Does a Return on Assets Say?

The return on assets figure is also a sure-fire way to gauge the asset intensity of a business. Companies such as telecommunication providers, car manufacturers, and railroads are very asset-intensive, meaning they require big, expensive machinery or equipment to generate a profit. Advertising agencies and software companies, on the other hand, are generally very asset-light.

What Does a Return on Assets Measure?

Return on assets measures a company's earnings in relation to all of the resources it had at its disposal (the shareholders' capital plus short and long-term borrowed funds). Thus, it is the most stringent and excessive test of return to shareholders. If a company has no debt, the return on assets and return on equity figures will be the same.There are two acceptable ways to calculate return on assets.

Calculating Returns on Assets

Option 1 is to multiply the Net Profit Margin by Asset Turnover. The second Option is to divide Net Income by Average Assets for the Period. The lower the profit per dollar of assets, the more asset-intensive a business is. The higher the profit per dollar of assets, the less asset-intensive a business is.

Thanks for watching.To learn more, visit About.com