Return on Total Assets Ratio

Return on total assets (ROA) = Net income available to common 

Return on assets (ROA) measures the amount earned per dollar of total assets the company owns. ROA shows how effectively management employs the company s assets (balance sheet) to generate a 

Assets have two components (1) how they are bought and financed, and (2) how efficiently they are operated. When measuring managers use of assets to generate a profit, it is beneficial not to include how the assets were financed. Dollars earned (net income) for ROA is an after interest and tax amount. To remove the interest and tax impact, use the basic earnings power (BEP) ratio. 

To reiterate, since accountants have some liberty in the way assets are valued on the balance sheet, discretion is necessary when comparing companies. 

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The return on total assets ratio is the net profit after taxes divided by the total assets expressed as a percentage. It reflects the overall return that a company has earned on its assets. The average for all industries is 10%, but figures vary widely. 

The return-on-equity ratio is the net income after taxes and interest divided by the stockholders equity. It sometimes is called the return on net worth, and this ratio is probably the best measure of management s performance. Returns on equity vary depending on company performance, but a figure of 15% is not um-easonable. The return-on-total assets ratio is the net profit after taxes divided by the total assets expressed as a percentage. It reflects the overall return that a company has earned on its assets a reasonable value is about 10%. 

A wider method of evaluating a firm s efficiency is the rate of return on total assets. Because the accounting equation requires that total assets equal the sum of fofal liabilities and total stockholder s equity, this ratio provides a measure of fhe firm s efficiency at managing both stockholder and creditor investments ... 

One measure of how a company uses its assets is the return on total assets, which is defined as the ratio of income before interest and taxes to total assets. Using data in Tables 16.3 and 16.4, this ratio for U.S. Chemicals is 1,390/14,211 = 0.098 or 9.8%, which is higher than the 4.84% achieved by Monsanto Company in the year 2000. 

Return on assets A profitability ratio reflecting a company s ability to generate net income as a percentage of its total assets. 

Another economic indicator, the debt-to-capital ratio, is defined as the long-term debt divided by the total capital. This ratio is an indication of how highly leveraged a company might be. The ratios for a selected industries are found in Table 8.33. The ratios for these companies have been relatively constant in the range of 0.27 to 0.42 over a 10 year period (1984-1994). As an example of how the debt-to-equity ratio affects the return on equity, let us consider two companies.. Company A has a debt-to-equity ratio of 0.35, and company B s ratio is 0.80 (see Table 8.34). Assume that the interest rate on debts is 10% and that each company earns 30 cents per dollar of capital before income tax and interest. The problem is solved by assuming that debt plus equity equals capital assets, which... 

Return on assets refers to the ratio of company s net income to its total assets, computed as... 

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