2017-09-07 / The Motley Fool

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Return on Assets, Explained

Understanding how to assess a company’s return on assets (ROA) can help you see how capital intensive it is and how much value it wrings from its resources. Capital-intensive companies require a lot of costly assets to generate their earnings. Examples include manufacturers, oil companies, retailers, railroads and airlines. Businesses with lighter business models (financial services and internet companies, for example) don’t have lots of factories, storefronts or inventory and can be more attractive, often sporting higher profit margins, too.

To determine a company’s ROA, you’ll find all the numbers you need on its recent balance sheet and income statement (sometimes called a statement of earnings). As an example, let’s review Wal-Mart’s fiscal-year 2017 results.

Return on assets is determined by dividing net income for a period by total assets during that period. Before we proceed further, know that net income is reported on a company’s income statement, and income statements reflect a period of time, such as a quarter or year. Net assets are found on the company’s balance sheet, which reflects the state of the company at one moment in time.

For fiscal year 2017, Wal-Mart reported $13.6 billion in net income. To get its total assets during that period, we’ll have to average its total assets as of the end of fiscal 2017 and 2016. Those numbers are $198.8 billion and $199.6 billion, respectively. Their average is $199.2 billion. So dividing $13.6 by $199.2, we get .068, or 6.8 percent. This shows that Wal-Mart creates 6.8 cents of earnings from each dollar of assets. The higher the ROA, the better, of course. (In contrast, eBay, not weighed down with stores and inventory, recently sported an ROA of 35 percent.)

It’s good to compare a company’s ROA to ROAs of other companies in the same industry and to track how it’s changing over time, as that can show it getting more or less productive. You can often find a company’s ROA (both current and past numbers) calculated for you at websites that feature stock data, such as morningstar.com. ¦

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