What factors affect return on assets?
Getting Behind ROA
If the return on assets is increasing, then either net income is increasing or the average total assets are decreasing. A company can arrive at a high ROA either by boosting its profit margin or, more efficiently, by using its assets to increase sales. Say a company has an ROA of 24%.
When a firm's ROA rises over time, it indicates that the company is squeezing more profits out of each dollar it owns in assets. Conversely, a declining ROA suggests a company has made bad investments, is spending too much money and may be headed for trouble.
An increase in sale, while lowering expenses, may increase the percentage of return on assets. Increasing sales to impact on ROA requires a proportionate reduction in expenses. Increasing the cost of goods sold while maintaining the current assets may also increase the percentage of ROA.
- 1) Increase Net income to improve ROA:
- 2) Decrease Total Assets to improve ROA:
- 3) Improve the efficiency of Current Assets:
- 4) Improve the efficiency of Fixed Assets:
The metric is commonly expressed as a percentage by using a company's net income and its average assets. A higher ROA means a company is more efficient and productive at managing its balance sheet to generate profits while a lower ROA indicates there is room for improvement.
- Use more financial leverage. Companies can finance themselves with debt and equity capital. ...
- Increase profit margins. ...
- Improve asset turnover. ...
- Distribute idle cash. ...
- Lower taxes.
The return on assets ratio formula is calculated by dividing net income by average total assets. This ratio can also be represented as a product of the profit margin and the total asset turnover. Either formula can be used to calculate the return on total assets.
Inconsistent profits, excess debt as well as negative net income are all factors that can affect the return on common stockholders' equity.
The risk-return preferences, inflation expectations, and a firm's capital structure all play a role in determining the required rate.
- Market risk (beta): The riskiness of a stock compared with that of its benchmark. ...
- Size: The market capitalization of a stock. ...
- Value: The measurement of a stock by its price-to-book ratio or other ratios.
- Profitability: The operating profitability of a stock's underlying company.
