What is the return on assets?
The return on assets is a measure comparing income of the company with its basic assets. It is commonly used as a way of comparing how well competing firms in the industry work due to their size. It can also indicate how much value of the company is tied in capital, which in turn can indicate how much investment can succeed. While some use of the ratio simply uses annual net income as a return, others add interest costs and then deduct the tax saving. This effectively makes the cost of some assets, such as the interest paid of the cash that was borrowed, from the equation. This is taken from data on assets listed in the company's balance sheet and includes cash, investment, money owed and buildings, equipment and supplies. In any cases, the average data on total assets are taken over during the current and previous year. There may be a risk that the assets are misleading because in this context it is common to give a listFinancial assets such as shares according to their "main value". This is the value they have purchased and does not have to reflect the price they would have brought if they had to be sold now.
Calculation of asset return can serve two main purposes. First, it can give potential investors an idea of how well the company performs with the assets it has. This may indicate that a small company can do a better job with an investment than a larger company. Another use is that the company itself analyzes how well it is likely to use the investment. If the current return on the company's assets is significantly lower than the interest rate that it would have to pay for lending money, it may be that they borrow money were ineffective until the company had some basic changes.
It is usually not very informative to compare the return on assets of companies from extremely different industriesthe sectors. This is because the nature of the industry itself can play as an important or even more important role in return with assets as the performance of individual society. For example, the processing industry may require significantly more capital, such as machinery than the service industry that can distort the characters of the ROA. There are also some industries that have legal restrictions at their level of asset, such as a financial company that is obliged to maintain a certain part of their cash obligations.