Importance of return on assets:

Return on assets is the efficiency ratio that use to measure the company use its assets to generate income. This ratio is calculated by using the bottom line that the entity generates during the period compared with the averages total assets.

There are many important factors that why this ratio is so importance for the company as well as its management. Here is the list of those:

Resources Efficiency Management

Return on Assets ratio is very important for management to assess how well they are currently managing the entity resources compare to previous year performance, competitor, as well as industry averages.

So this ratio help management to review their resource management when the ratio is going down or maintain current performance when the ratio going up especially when the entity ROA higher than industry averages.

A lower ratio indicates that the entity did not generate enough income compare to the industry or expected from the shareholders. This also indicates the weak performance by top management, especially CFO.

Formula:

Return on assets = Net income/ Averages total assets

Return on assets is calculated by comparing the net income of the entity for the period of time to the averages total of assets. Net income refers to income that the entity generates after interest and income. Net income could be found in the income statement.

Averages of total assets are the averages of total assets at the beginning and ending of the period selected for assessment.

Related article  Fixed Charge Coverage Ratio: Definition | Using | Formula | Example | Explanation