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Return on assets

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The Return on Assets (ROA) percentage shows how profitable a company's assets are in generating revenue.

ROA can be computed as:

   Return on Assets = (Profit margin) * (Total Asset Turnover)

or

   ROA = EBIT  / Total Assets = (Sales/Total Assets) (EBIT/Sales)

This number tells you "what the company can do with what it's got", ie how many dollars of EBIT (earnings before interest and taxes) they can achieve for 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. Capital-intensive industries (like railroads and nuclear power plants) will yield a low return on assets, since they have to spend such assets to do business. (And if they have to pay a lot to maintain these assets, that will decrease the ROA even more, since the maintenance costs will decrease their earnings). Shoestring operations (software companies, job placement firms) will have a high ROA: their required assets are minimal.

When to use it:

Return on assets is an indicator of how profitable a company is. Use this ratio annually to compare your business' performance to your industry's norms.

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