Return on net assets

Return on net assets
See also

Return on net assets is a measure of profit attributable to total assets. It talks about the company's ability to generate profits and the effectiveness of managing its assets. The higher the ratio, the better for the company because the financial situation of the company is better. It informs about the company's ability to generate profits and the effectiveness of managing its resources. ROA is also an important indicator for institutions granting loans [1].

ROA = net profit / total activity x 100%

Description of the indicator Return On Net Assets

Return On Net Assets indicates the ability of a company to generate a net profit from its assets (total capital). High values of the indicator indicate high profitability of total assets. It should be remembered, however, that high values of the ratio may be caused by the age of the fixed assets involved, which, although depreciated to a large extent, did not lose production Capacity. Therefore, the degree of wear and tear of fixed assets should be additionally taken into account in the assessment and, if it is high, it should be taken into account in the interpretation. ROA is very similar to ROE. The difference lies in the fact that in ROE we check how well for example each dollar belonging to a company (not indebted) can earn, while ROA measures how well each dollar invested in a company can earn (regardless of whether it is indebted or comes from a loan). ROA (if positive) is smaller than ROE because 'assets are always larger than equity. High values of the total assets profitability ratio and the increase in its level over time are assessed positively (it proves high or increasing profitability of total assets). We consider the low value of the ratio and the decrease in its level in time as negative (it indicates low or decreasing profitability of total assets). Of course, the best value for ROA is several dozen per cent. However, one should be careful, as very high profitability is usually difficult to maintain for a long time and often more valued is 10% maintained for several years than a one-time jump on 30%. Therefore, it is always worth noting the historical ROA chart and comparing it with ROA for the industry and the broad market [2].

Application of Return On Net Assets

Indicative analysis is one of the segments of the general financial analysis of the company. It deals with the study of the state and development of the company's finances, i.e. it provides information about the financial condition of the company [3]. Running your own business, which will achieve profits, would be very difficult without the analysis of factors and events occurring in the organization - affecting the obtained financial results. For example, the fact that a company generates income of US$5 000 does not provide us with relevant information without knowing the amount of income in a given period and the value of assets and equity [4]. Based on the results of this analysis, managers can properly direct the activities of an economic entity and identify areas of improper management that may harm the functioning of the company in the future.

As the name suggests, index-based analysis is based on a set of specific indicators. They provide a picture of the links and relationships between the figures in the financial statements [5]. In this case, the main sources of information are the balance sheet and the profit and loss account [6].

According to both theoreticians and accounting practitioners, these two elements of the financial statements contain the most relevant information needed to analyse the financial position of a company. Profitability indicators are very often considered to be the most important element in analysing the financial and asset situation of a company. Not only for business people but also individuals and businesses in the immediate environment (e.g. contractors, customers, suppliers, banking institutions, etc.).

The basis for determining profitability are the ratios showing the relationship between the two:

  • the amount of profit generated by the company and
  • the value of the factor whose profitability we intend to determine.

From a mathematical point of view, profitability is presented as the quotient of net profit to the appropriate value of a specific financial component - expressed as a percentage. The return on assets can be developed to examine the financial performance of both groups of assets separately:

  • Return on fixed assets:

ROA = net profit / fixed assets X 100%

  • Return on current assets:

ROA = net profit / current assets X 100%

In summary, the return on total assets ratio is used in the business to examine the quality and efficiency of the company's management. The two other indicators, which are an extension of the ratio, help to assess the level and proper debt service [7].

Footnotes

  1. L. Warrad 2015, pp. 89
  2. M. Heikal, et al. 2014, pp. 121 - 123
  3. A. Majed 2012, pp. 115 - 120
  4. J. Jewell, J. A. Mankin 2012, pp. 2 - 3
  5. J. Jewell, J. A. Mankin 2012, pp. 2 - 3
  6. A. Majed 2012, pp. 115 - 120
  7. M. M. Zamfir, et al. 2016, pp. 98 - 101

References

Author: Aleksandra Morzywołek