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Monday, May 21, 2012

Return on Assets/ Return on Investment

Return on Assets/ Return on Investment

Return on Assets or ROA is a way to measure how productive the assets of the company are. Basically put it is a measure, expressed in a percentage to show whether or not the company’s assets are being used profitably.

Return on Assets (ROA) and Return on Investment (ROI) are basically one and the same.  To calculate ROA we take the Net Income and divide it by the Total Assets

= Net Income / Total Assets
Expressed as a percentage
Generally we determine this on an annual basis but any specific time period will do. So, monthly would be a way to calculate ROA but, again, generally speaking this is done on a yearly basis.

If Billy-Bob has a total investment of $1,000 in his still (including all corn mash in inventory, all jugs in inventory and his pickup) then that is our figure for total assets.
If Billy-Bob sells $100 worth of shine after expenses are accounted for then we divide the figures.
= $100 /1000
10% Return on Assets

In business we often use terms like ROA and ROI instead of saying Return on Assets etc. I think this is so that we appear to be smarter than we actually are. It is often intimidating for someone to talk to you in jargon that you don’t understand.  I learned a long time ago to speak up and say, “could you please put that in stupid terms for us stupider people?” If the person stops and explains it then, you have learned what they were talking about. If the person belittles you for asking the question then, you have learned that they are a jerk and probably don’t know much more than a few terms. In this case, take your business elsewhere.

Tell us about a time when someone tried to intimidate you with jargon. 

The opinions or advice listed in this blog or website should be used as a place to start only. It is not a substitute for the use of a professional.
Please be sure to consult your attorney and/or accountant with any specific questions.
There is no one right answer to any business question that will cover all circumstances.
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