Return on Assets
Return on assets (ROA) is a profitability ratio that demonstrates a company’s ability to generate a return for all of its investors, whether they provided debt or equity financing. In its simplest form, ROA can be calculated as (net income)/(average total assets). For Plantronics:
| 2006 |
2005 |
|
| Net income | 81,150 | 97,520 |
| Total assets | 612,249 | 487,929 |
| Average total assets | 550,089 | |
| Return on assets | 14.8% |
The higher the ROA, the more profits the company generates per unit of assets.
One issue with the computation above ( which is the one that most data services use) is that the denominator contains the contributions of all investors, while the numerator has already accounted for the contribution of debtholders by deducting interest expense in arriving at net income. To appropriately measure the profits that are available for return to all investors, the numerator could be more precisely measured as ((Net income + Interest expense * (1 – Tax rate)).
An alternative shortcut that still keeps all investors on equal footing in the numerator and denominator would be to use the pre-tax ROA, calculated as EBIT/(Average total assets). For Plantronics in 2006:
| EBIT | 110,362 |
| Average total assets | 550,089 |
| Pre-tax ROA | 20.1% |
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
