What is ROA and how to calculate it?

Management Leave a comment   Published on par Jonatan Carbonell

Do you know what your company’s ROA is? Discovering this data is a determining factor that will help your business meet the objectives set and obtain the profitability you so desire. So, do you want to learn how to calculate it? We explain how to do it!

What is ROA?

In the business world, ROA is known by its acronym in English (Return Of Access) and in Spanish, also called ROI (return on investment). This term is a ratio or management indicator that calculates the profitability of a business in relation to its assets and equity.

We can say, then, that ROA provides fundamental information within the company, and more specifically in the finance and marketing departments. Why? Strategic decision making will be influenced by the number we obtain once our ROA has been calculated.

It is also a key guide in investor relations, as it will allow you to analyze the feasibility of putting money into your company, or increasing it after a certain period of time has elapsed.

 

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How can I calculate ROA in my company?

Now that you know what ROA does, you are probably interested in knowing how you can calculate it to analyze your company. Right? Below, we explain the formula to achieve it:

To obtain the ROA you must divide the income obtained during a period of time by the total assets of the company and multiply it by 100.

It is important to bear in mind that the profit that you will take as a reference for the calculation must be obtained before including financial and tax expenses, i.e. EBIT.

For example, let’s assume that last year your company had total assets of 10 million euros, and 2 million euros of profit. Then your ROA will be:

2.000.000 € / 10.000.000 € X 100 = 20%

This means that the profitability of your business is positive and your return on investment is on track.

Can ROA be negative?

One of the most frequent doubts at the time of calculating the expected return on investment is what happens if the result is negative. And the answer may be obvious, but we prefer to explain it better: a negative ROA is a sign that your business is not obtaining the expected benefits, or that it is generating losses.

In the case of starting a company from scratch, the first few months your ROA may not be positive. However, by implementing the right strategy this situation should turn around and increase progressively.

What is a good ROA?

So, if you feel that you are already at the stage where you have recovered the initial investments and are achieving a positive ROA, you should know that if it is above 5%, it is a sign that you are obtaining the expected benefits and are meeting the standards of corporate profitability.

Conversely, if the ROA is less than 5% but greater than 1%, it means that the investment is not yet being recovered with as much profit as it should be.

In some companies, owners focus their marketing plan on improving profitability, using the following main techniques:

Increase margin: which helps you achieve more income than expenses, or on the contrary, decrease monthly expenses until they are below sales.

Increase turnover: the aim is to increase sales in relation to net operating assets or to decrease net assets more than the decrease in sales.

 

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Difference between ROA and ROE

Like ROA, ROE is a business management indicator. However, the latter measures how profitable a company is in relation to its own funds. Therefore, this data will be of interest not only to owners and shareholders, but also to banking institutions.

Another differentiating aspect you should know about ROE is that it does not take into account the debt ratio in its analysis.

How to calculate ROE?

Calculating ROE is also quite simple. You only need to divide the net profits obtained by the average equity, and then multiply it by 100. And, as with ROA, any result above 5% is considered optimal and profitable.

On the other hand, comparing ROA with ROE will allow you to measure the growth of your company in financial terms and will help you to make subsequent decisions.

In general terms, if you are looking to know the profitability margin of your business, it is important that you proceed to calculate the ROA and study the efficiency of your strategy and the return it generates over a given period of time.

 

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Would you like to be informed about the topics that can contribute to boost your business in Spain? Enter our blog and consult all our content or contact our experts to advise you in the creation and management of your company in Spain.

 

Published on par Jonatan Carbonell

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