Return on Assets

Chapter 6: Financial Statement

Analysis 2
• What is Return on
Assets
-Also known as ROA, return on asset is computed
as net income divided by average total assets.
ROA can also be computed using the ending
balance of total assets instead of average total
assets. It is a popular measure of the profitability
of the company’s assets. It also measure the
company’s efficiency to generate income by
employing its assets. In comparing companies,
the company with a higher ROA is judged to be
more profitable.
• Importance of Return on
Assets

-It is important because it is a valuable

measurement that both investors and business
owners can use to determine how efficient the
company is at using its assets to generate a profit.
You can begin by comparing a company's return on
assets percentage from one year to another and
looking for trends or changes. Doing this can help
investors determine whether a company is likely to
have potential issues in the future.
• Importance of Return on
Assets
-You can also use the company's return on assets
percentage to compare the company to similar
companies. However, it is important to make sure
you are comparing numbers for companies that are
similar in size and are in a similar industry. This will
allow you to compare how well a company is
performing compared to other companies.
Generally, the higher a company's return on assets
percentage is, the more efficient the company's
management is in generating profit from its assets.
• How to calculate return on assets
using net income and total assets

• Find the company's net income.

• Find the company's total assets.

• Divide net income by total

assets. And multiply it by 100.
• Formula

ROA = Net Income

Average Assets
• Example
• Net income: Php 150,000.00

• Average total assets: Php 800,000.00

• Solution

ROA= 150,000 / 800,000

= 0.1875
= 0.1875 x 100
=18.75%
 Profitability Ratio

JC Trading Company
Statement of Financial Position
As of December 31

(In thousands)
2004 2003
Cash and Cash Equivalents P 470.31 P 519.86
Accounts Receivable, net 660.11 565.17
Inventory 653.06 555.48
Prepaid Expenses 173.74 228.81
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Total current assets 1,957.22 1,869.32
Property, Plant and Equipment, net 5,910.53 5,501.66
Intangible Assets 745.20 721.91
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Total Assets P 8,612.95 P 8,092.89
=====================================================================================
Current Liabilities P 1,273.05 1,123.70
Long-Term Liabilities 577.58 541.54

Total Liabilities 1,850.63 1,665.24

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JC, Capital 6,762.32 6,427.65
-------------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Owner’s Equity 8,612.95 8,092.89
=====================================================================================
JC Trading Company
Statement of Financial Position
As of December 31

( in thousand )
2004 2003
Sales Revenue P 5,385.86 P 4,921.85
Cost of Goods Sold 1,374.79 1,254.86
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Gross profit 4,011.07 3,665.99
Selling and Administrative Expenses 3,406.46 3,127.15
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Operating Income 604.61 539.84
Interest Expense 11.82 23.04
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Net Income 592.79 516.80
Thank you for
listening!!
Presented by: Catherine Rodaje