Why is the Return on Assets Important?

Importance of return on assets:

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

There are many important factors that why this ratio is so important 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 compared 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 goes up, especially when the entity ROA is higher than industry averages.

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

Formula:

Return on assets = Net income/ Averages total assets

Return on assets is calculated by comparing the entity’s net income for the period of time to the average 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 end of the period selected for assessment.

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