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Return on assets

Return on assets

Description

This is a very popular and, again, a very simple ratio, which reflects a relationship between company’s income and the assets, used to generate it. Data to calculate this ratio is collected from the balance sheet (assets) and income statement (income). ROA is a key indicator which is used to evaluate how profitable a company in relationship with its total assets.

Norms and limitations

In most cases the owners and investors find ROA value of less than 5% not acceptable. However, for banks that are interested only in safety of their credits, a value of ROA as low as 1.5% is rather reasonable.

ROA is very dependent on the industry that the company is operating in. In such industries as shipbuilding industry, return on asset ratio is usually low. On the other hand, in industries like software industry the same ratio is significantly higher. So it is not reasonable to compare a value of ROA between companies from different industries.

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