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 entity generate during the period compare with the averages total assets.

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

Resources Efficiency Management

Return on Assets ratio is very importance for management to assess how well they are currently manage 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.

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

Formula:

Return on assets = Net income/ Averages total assets

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

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