How to Use Return on AssetsReturn on Assets shows how effectively a company employed its assets to generate profits. It is calculated as:
Because a company may own or finance its assets, the ratio measures how well a company has converted all of its resources into profit It is therefore the most stringent measure of how well a company has utilized its resources to generate profits. A higher number indicates a firm more effectively employed its assets to generate profits. Asset intensive industries such as manufacturing and railroads have much lower percentages due to a much larger asset base, while the software industry generally has much higher percentages due to fewer assets required to generate profits. For this reason it is important to compare the results with industry standards and competitors.
This means that Sunny Sunglasses Shop earned $.15 for each dollar of assets employed, while its closest competitor, Luxottica, earned $.10 for each dollar of assets employed, and the Specialty Retail Industry averaged approximately $.07 for each dollar of assets employed. High ROA levels may be due to a short - term factors such as:
For this reason it is important to review a long-term average of ROA:
Luxottica and the Specialty Retail Industry posted consistent ROA numbers over five years, while Microsoft and the Software Industry did not consistently maintain as strong of returns.
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