Return on assets means the relationship of net income and total assets. It is different from return on investment ratio. Return on investment ratio is the relationship between net profit and investment. Investment is the part of total assets. In total assets, fixed assets, investments and current assets are included.
ROA = Net Profit / Total Assets
For example :
If total assets are Rs. 1,00,000 and net profit is Rs. 25,000, return on assets ratio is 25%. It simple means, if any company invests all the assets in the business it will get Rs. 25 of invested every 100 of its total asset.
Effect of Increases or Decreases of Return on Assets Ratio
This ratio can easy increase or decrease if any of part element of ratio will change. For example, if company will take more loan and invests it in business. It will increase total value of cash which is the part of current assets and same current assets are the part of total asset. If the value of net profit is same and value of total asset will increase due to high quantity of loan, it will surely decrease the return on assets ratio. At this time, we have to think wrong, it is not negative symptom of company's grow. Loan's impact will take time. So, better is calculate ROI for better understanding of progress of company. Increasing the return on assets is always good sign of progress of company
Taking Decision if ROA is Negative
If ROA is very high, at that time, you need to increase cheap debt. At that time, your ROA will increase fast rate. But if you do not see your current ROA and take big debt, your ROA will be negative because your net income will not cover the interest cost. So, this so bad situation for your liquidity. At that time, you need to clear your all debt as soon as possible.
Reference of eBook
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ROA = Net Profit / Total Assets
For example :
If total assets are Rs. 1,00,000 and net profit is Rs. 25,000, return on assets ratio is 25%. It simple means, if any company invests all the assets in the business it will get Rs. 25 of invested every 100 of its total asset.
Effect of Increases or Decreases of Return on Assets Ratio
This ratio can easy increase or decrease if any of part element of ratio will change. For example, if company will take more loan and invests it in business. It will increase total value of cash which is the part of current assets and same current assets are the part of total asset. If the value of net profit is same and value of total asset will increase due to high quantity of loan, it will surely decrease the return on assets ratio. At this time, we have to think wrong, it is not negative symptom of company's grow. Loan's impact will take time. So, better is calculate ROI for better understanding of progress of company. Increasing the return on assets is always good sign of progress of company
Taking Decision if ROA is Negative
If ROA is very high, at that time, you need to increase cheap debt. At that time, your ROA will increase fast rate. But if you do not see your current ROA and take big debt, your ROA will be negative because your net income will not cover the interest cost. So, this so bad situation for your liquidity. At that time, you need to clear your all debt as soon as possible.
Reference of eBook
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- Fixed Assets Turnover Ratio
- Return on Investment (ROI)
- Leverage Ratio Analysis
- Cash Flow Ratios
- Current Assets Turnover Ratio
- Proprietary Ratio
