RETURN ON ASSETS Definition

RETURN ON ASSETS (ROA) shows the after tax earnings of assets. Return on assets is an indicator of how profitable a company is. Use this ratio annually to compare a business performance to the industry norms: The higher the ratio the greater the return on assets. However this has to be balanced against such factors as risk, sustainability and reinvestment in the business through development costs. 

Higher ROA is better, but extremely high ROA may be an indicator of vulnerability as to any sustainable competitive advantage.

Formula: Earnings After Tax (EAITDA) / Total Assets

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PREDICTOR RATIOS: Most ratios are descriptive in nature; that is, they describe the firm as it is now. As you might expect, Predictor Ratios provide suggestions about likely future conditions for the firm. VentureLine provides two industry standard Predictor Ratios:

1. Altman Z-Score - a valid predictor or bankruptcy, and,
2. Sustainable Growth Rate - shows the degree to which a concern can grow using their retained earnings to fund growth.

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