ROA

return on assets (ROA)

A percentage calculated by dividing net income after tax by total assets. Annual income is usually used in the numerator; however, the annualized income for a month, quarter, or half year can be used. Period-end assets is often used in this calculation; however, average assets for the period is more accurate. This ratio is a measurement of how profitably assets are used in an enterprise. Firms in different industries usually have quite different returns on assets. This ratio is best used to compare firms in the same industry. American Banker Glossary

————

I

See: return on assets

II

See: right of accumulation

————

Rehabilitation of Offenders Act 1974. HM Customs & Revenue Glossary

* * *

ROA ROA

FINANCE abbreviation for return on assets

* * *

   Return on Assets. A company's ability to operate profitably can be measured directly by calculating its return on assets using three ratios.

   1. RETURN ON TOTAL ASSETS (ROA)

   ROA is calculated as a ratio of the attributable profits for the last 12 months to total assets (fixed and current) for the same period, expressed as a percentage. It measures how effectively a company can generate earnings from its assets. It is a better measure of operating efficiency than ROE (Return on Equity), which only measures how much profit is generated on the shareholders' equity, but ignores debt funding. ROA is particularly relevant for banks, which typically have huge assets. Some analysts use earnings before interest and taxes (EBIT) rather than net profit to measure operating efficiency, arguing that management has little influence on interest rate and taxation levels.

   Formula: Net profit/total assets x 100 Example

   In the last financial year The Old Rope Corporation had total assets of £1,407 million and net profits of £64 million.

   ROA

   64/1,407 = 4.54 percent

   2. RETURN ON FIXED ASSETS

   This is the ratio of attributed profits to fixed assets alone, expressed as a percentage. It measures how effectively a company can generate earnings for its long-term assets such as land and machinery.

   Formula: Net profit/fixed assets x 100 Example

   In the last financial year The Old Rope Corporation had fixed assets of £960 million and net profits of £64 million.

   Return on fixed assets: 64 / 960 x 100 = 6.66 percent

   3. RETURN ON CAPITAL EMPLOYED (ROCE)

   ROCE is the ratio of operating profit (earnings before interest and tax) to capital employed, expressed as a percentage. Capital employed equals shareholders' funds plus long-term liabilities - in other words, all the long-term funds used by the company. The ratio measures the return on all sources of finance used by the company (i.e. equity plus debt) and is very similar to return on assets (which includes current liabilities).

   Formula: ROCE = EBIT/total capital employed x 100 Example

   In the last complete financial year The Old Rope Corporation earned an operating profit of £77 million. It had shareholders' equity of £300 million and long-term debt of £267 million, making its total capital employed £567 million.

   ROCE: -77 million/567 million x 100 = 13.58 percent

* * *

ROA UK US noun [U] FINANCE, ACCOUNTING

► ABBREVIATION for RETURN ON ASSETS(Cf. ↑return on assets): »

ROA is an indicator about how profitable a company is relative to its total assets.