ROA gives a manager, investor or analyst an idea of how effectively a company is using its assets to generate profits. Here, we will use another example.
Imagine Peter and Paul, who plan to total oil and gas company canada whatsapp number open hot dog stands. Peter spends $1,500 on his stand, while Paul spends $1,000. After a week, Peter has earned $250 from selling hot dogs, while Paul has earned $200.
In this case, you can see that even though Peter earned $50 more, Paul's company is more efficient. ROA therefore shows how effectively a company manages its assets. As with the previous two indicators, it is worth comparing the results with those of the competition and industry averages. A company should also compare its results recorded in previous periods.
It is also often asked what the difference is between ROE and ROA. Both ratios measure how a company uses its resources. Essentially, ROE only illustrates the return on a company's equity, ignoring liabilities, unlike ROA. The more leverage and debt a company takes on, the higher the ROE relative to ROA.
Interpretation of ROA, ROE and ROS
To have a clear picture of the company, it is not only useful to know its profitability indicators and know how to calculate them, but also to know how to interpret them. Don't know how to do it? We come to the rescue!
The higher the ROA level, the better the situation of the company in question. If the ratio is negative, the company is not generating profits, but losses. To reach concrete conclusions, it is necessary to:
- compare the result obtained with the average value of the indicator in the sector,
- analyse the previous values of the company's ROA and compare them with the current one,
- compare the result with those of the company's main competitors.