It comes from the English term “Return On Assets”, It is also known as "Return on Investments" o ROI. It is one of the most important financial parameters today, it is currently used by all companies that want to establish their profitability, The ROA, consists basically of calculate la relationship that exists between benefit obtained in a certain period and the assets global of a company.
Its importance is based mainly on the fact that it allows register directly the degree of efficiency which have that assets totals of a company, regardless of the forms of financing used, as well as the load fiscal of the country in which the company carries out its commercial activities. Rather, the ROA allows the person in charge of finance to measure the capacity of the assets of a company for generate income by they same.
How to calculate ROA?
The ROA parameter can be calculated with the following method:
ROA = EBIT benefits
_________________
Total Assets
Perhaps it seems somewhat complex to understand, due to the terminology, to clarify a little more its realization you have to understand that the benefits EBIT mentioned in the formula refers to those benefits that the company obtains before de to discount that interests, impuestos, And the Amortization.
In the second part of the formula he mentions the Total Assets, whose meaning corresponds directly to the average asset de of consequent balances.
The reason why EBIT is used as the measurement factor to calculate the ROA, instead of using the profit after interest and taxes, it is mainly due to the generation of ingresos which proceed of the assets Is completely independent of la load fiscal on benefits and to the source of financing used, are external factors.
This parameter indicates that Options has our company with the indispensable and necessary assets that it owns, in other words, how much profitability each euro you have invested in it, which is very useful when you want to make comparisons between several companies, as long as they are within the same sector, since the profitability of the investment varies depending on the sector in a very considerable way. In very general terms, we can say that an index ROA over 5% It is done generating a greed significant.
It is then about the calculation of the benefits Of a company, between weighted average assets.
Where the benefit refers specifically to benefit got before of the costes financial and the effect tax, while the asset has to be averaged over the last two months as already mentioned.
ROA calculation example
The first example is a business that manufactures parts, the ROA would be the accounting profit What is obtained from the exercise divided between the assets of the business, these can be from: premises, machinery, money, or stocks in inventory.
By way of alternative can you get the ROA above the sales margin, as long as it is considered that:
ROA = Margin on sales x Asset turnover
Formula in which the Margin on sales es same to the:
Our Mill
____________
Sales
And where the Asset turnover es same a:
Sales
_________________
Average total assets
Continuing with the example of the company that manufactures parts, there are two different variables for calculate la profitability of the business, These are total sales volume y the margin achieved for each sale. This means that to achieve a profitability of the 10% for the parts company, there are two different ways to achieve this.
The first is selling 10 products with a benefit of 1% and the second is marketing a single piece with a profit of 10%. With either of these two options, the same result is obtained, the important thing is to firmly define one for the destination of your business, depending of course on the price you obtain to get the raw material, among other factors, if you do not have the lowest price, offers the best quality and charges for it, if you manage to sell at a wholesale price you should obtain large sales with little profit, which together will begin to generate a greater profit, as long as you have a capable sales team.
ROA varies between different industries
Regardless of the sector to which the company belongs, a good ROA It is the one whose value exceeds 5%, although this value tends to fluctuate depending on the industrial sector being analyzed. Because clearly a company from the metallurgical industry is not the same as a restaurant in the center of Madrid.
This is due to the initial investment to start the business, since, having a company with a greater initial investment of assets, will consequently have more sales capacity and will be able to reach those customers who demand high amounts of product.
On the other hand, if it starts with a smaller amount of assets, the company will have to get it back in sales, to be able to buy a little more each time, depending on the demand for it.
When you manage to get the assets at the best market price, when extracting or producing them, you have the option of controlling the demand for the product, an unethical action in my point of view, but very commonly carried out by the big monopolies.
ROA facilitates comparison between companies
A very obvious example of its use for the comparison between companies is, a company that has requested a loan to finance its machines in a country with a very high tax burden, will have the same ROA than another country with a lower tax burden, or that has used its own resources to finance the business, but sells the same. Making it possible with this, the comparison between companies in the same sector, even if they operate in completely different countries and situations.
Their knowledge allows to indicate what a company can do with the assets what you have available; in other words, it is how much profitability provides each euro that has been invested in the company or society. For example, an oil company that has a ROA of the 15% means that each euro invested in the company to acquire new investments, will generate 15 cents de euro as benefit.
El target chief financial officer of any company, is to improve the profitability of the same, especially if there are investments made recently, so more obvious results are required of them. In fact, this is the essence same of the finance of a companyIn other words, it is the capacity that it has, to generate a sufficient income flow to achieve those objectives that have been set.
La profitability what do the assets represents the profitability flexibility that the company has, this means that the profit obtained in the company with la investment made. That is, the total value based on the conventional activity.
In short, it is a measure that evaluates how efficient a company is being, and gives us a broader picture of the benefit that the company can generate from the resources invested.
Acting
Based on the formula to obtain the ROA that has been shown to you, we can deduce what a company has to do in order to improve its ROA:
- Increase the sales margin, by reducing manufacturing and production costs or by increasing product prices.
- Increase the rotation of assets, increasing the number of sales in new markets or in the same ones through some commercial action that benefits the popularity and sales of the company.
As analysis, we have of different models to obtain a high return on assets: the first model are companies with a high profit margin such as luxury goods, brands such as Apple, Rolex, Bentley, and on the other hand we have the model of companies with margins small de greed in their products, but with a huge rotation of the assets, cases like: McDonald's, Burger King, Pizza Hut.
Difference between ROE and ROA
You have to clearly define the ROA with the ROE since, although in some cases they are usually equal numbers, in many other cases they are not.
If the company does not have financing debt, the ROA and ROE they will match. But in the event that the company has debts of any kind, then the ROE will always be higher than ROAThis is due to the leverage that occurs in the debt, since not so much fixed assets are required to carry out business activities normally.
El ROE measure the capacity that the company in question has, in order to remunerate economically to shareholders that are associated in this, so if it involves aspects of financial and tax debt.
El ROA Instead, it is used to precisely measure the efficiency of the company's total assets, regardless of the way it was financed and the tax laws in the country where the company's activities are carried out.