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What Is A Return On Asset?

The Motley FoolReturn on asset or ROA is a measure of how much profit is generated by a business for every dollar of asset employed. It is a simple and quick way of determining how efficiently a business uses the assets at its disposal.

It is easy ratio to work out: simply divided the annual net profit for the company by the total assets. It is generally expressed as a percentage. The net profit can be found in the Profit & Loss account, while the latter can be found in the balance sheet.

On its own a ROA has limited use. However, it can be used to examine how a company’s use of assets has changed over time. Has it been improving or deteriorating? Ideally, you would want to see it getting progressively better.

A company’s ROA can be compared against other businesses within the same industry, too. This is when the ROA can be a powerful ratio. A business with a higher ROA is deemed to better at utilising every dollar of asset into profits. Consequently, a company with a higher ROA compared to its rivals should, theoretically, be a better investment.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.