Return on Total Assets

The return on total assets (ROA) allows an analyst whether:

• The margin on sales earned is reasonable
• The assets of the company are adequately and effectively used;
• The interest payments made by the company is too high.

This, is as the measure, should be used to compare performance between companies within the industry and with pervious years. This is computed as follows:

ROA = net income after tax / average total assets

For e.g. financial statement of XYZ ltd. include the following figures:



Net income after tax in:
Year 2006 is 150 crores and in year 2007 is 200 crores

Total assets in:
Year 2006 is 4000 crores and in year 2007 is 6000 crores


The return on total assets in 2007 is:

200
--------------------- X 100 = 4 %
.5 X (4000+6000)

i.e. The analyst must compare this return with that earned by other similar companies to determine the return is reasonable.