What is ROA? The ROA index tells what and how much is best
In investing, evaluating the performance of a business is extremely necessary. One of the important indicators used to evaluate this efficiency is ROA. So what is ROA ? What does this index mean for businesses? The article below from 1C Vietnam will specifically explain the above concerns.
1. What is ROA?
ROA is the abbreviation for the English phrase Return on Assets, which means return on assets. This is an important index to evaluate the efficiency of asset use of a business.
An increased ROA shows that the business is using assets effectively, generating more profits. On the contrary, a decrease in ROA shows that the business is not using well and making less profit from an asset.
According to Forbes.com's summary, ROA above 5% is considered good, and above 20% is very good. However, businesses need to compare ROA with competitors in the same industry and same scale to accurately assess the level of effectiveness.
2. Basic and advanced ROA calculation formula
In addition to wondering what the concept of ROA is , the standard formula to calculate this index is also an issue that many businesses are interested in and learn about.
In case a business only calculates ROA at a certain time, the following basic formula can be applied:
ROA = Profit after tax / Total assets
In there:
- Profit after tax is taken from the business results report of the enterprise.
- Total assets are shown on the business's balance sheet.
In addition, when you want to evaluate efficiency over an entire period, businesses can apply the advanced formula when calculating ROA as follows:
ROA = Profit after tax / Average total assets
In there:
- Average total assets are the average value of assets at the beginning of the period and assets at the end of the period.
For example:
Suppose, a business has a profit after tax of 100 million VND and total assets of 1 billion VND. According to the basic formula, the ROA of a business is 10%.
If using the advanced formula, the average total assets are 500 million VND (ie the average of 500 million VND in assets at the beginning of the period and 500 million VND in assets at the end of the period). Thus, the enhanced ROA of the business is 20%.
3. How much ROA is good?
According to international standards, a business is considered to operate effectively when ROA reaches 5% or more and return on equity ROE reaches 15%. However, in reality, the ROA index for each business may be different, depending on a number of factors listed in the table below:
Element | Describe |
Field of activity | To evaluate whether ROA is good or not, you need to compare it with companies in the same field. |
Competitors in the same industry | ROA is higher or equal to the average of competitors in the same industry. |
Operating results of the previous quarter | ROA growing or stable. |
4. Distinguish between ROA and ROE
ROA and ROE are two important financial indicators used to evaluate business performance. Both of these indicators measure a company's profitability, but there are differences in characteristics and calculation methods. Specifically:
Characteristic | ROA | ROE |
Concept | Return on total assets | Return on equity |
Characteristic | Financial leverage is not considered | Consider financial leverage |
Calculation formula | ROA = Profit after tax / Total assets | ROE = Profit after tax / Equity |
Thus, ROA and ROE are two important financial indicators, but cannot replace each other. ROA measures the efficiency of using a business's assets, while ROE measures a company's profitability on equity. Therefore, to accurately evaluate an organization's performance, managers need to consider and evaluate both of these indicators.
5. Meaning of ROA index for businesses
ROA is always an important indicator that businesses review and evaluate periodically. So what does the ROA index say? This is considered the basis for evaluating the performance and business strategy of the enterprise, specifically:
- Reflects the ability to manage assets and operational efficiency of the business: ROA shows how much profit 1 dong of a business's assets generates. The higher the ROA, the more effectively and profitably the company manages its assets.
- Evaluate the business strategy of the business: If ROA and ROE are high and increase over time, it shows that the business strategy of the business is on the right track. When ROA decreases, the organization needs to review its business strategy to find the cause and provide timely adjustment solutions.
To summarize, the above article has introduced in detail the concept of ROA and the meaning of the index for businesses. This is important information to help evaluate the company's performance. A high ROA shows that a business is using assets effectively to generate profits. Don't forget to follow other articles on the 1C Vietnam website to update more useful information about corporate governance.