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Return on Assets
Replied Nov. 23, 2009
Return on Assets
14 Replies
Started this discussion. Last reply by Andrew Tsai May 28.
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i think option 2 is preferable. there were two different numerators:
net profit + interest =(1-tax)EBIT+tax*interest
net profit +interest(1-tax) =(1-tax)EBIT
first one means "real" net return since most companys have interest bearing debt and they g…
It has to and it is net profit/total assets .because if u take the debt part into consideration ie (intrest paid or payble to them ) then it would be misleading because nodoubt their funds are used in business and resulting into the profits but they…
I agree with stefan .This would be a better ratio for the measurement of asset performance.
The idea of ROA is to provide benchmark of how a company is peforming compared to its size. Futher how it is perfoming comapred to the sources of financing is ROE.
What would be the driver behind your idea of oprion 2? It is the to add interest the…
hi..
In my view, as Return on Assets measures the efficiancy of utlizations of assets in generating profits. You must choose option 1 only.
regards
Anand
thanks Amit for helpful explanation.
According to me, best way to look at the ROA is take into consideration the DUPOND analysis. this covers the profitability capacity and efficiency of the company. formula for this is
ROA= Net profit margin( Net Profit/sales)x Assets turnover ( Sale…
Number 2 is the better choice however, you should discount the interest payment net of taxes, so the formula should be:
Net income + (interest expense *(1- tax rate)) / average total assets
Well, ROA is a measure of use of efficiency of assets by an organization, if we take argument no 2, then probably there will be some assets which will be financed through interest free loans ( unsecured loans advanced by promoters). On a serious not…
I have read lot of references, and theoritically the approach are different each other. Usually, the option number 1 is the common formula, but there is an exception to the rule that if there is interest-bearing debt, ROA is computed as Net Income +…
The second option is more appropriate in the context of ROA calculation. it is the Total income/ outstanding Loan Value (Total Asset). total income is basically income before interest repayment.
Numerator has to be Net profit after interest and taxes to arrive at the correct picture. That is what a company is generating through its assets. If you add interest expense to the net profit or take EBIT then you may lead to wrong interpretations,…
From economic (actual perspective) option 1 has been using almost in every valuation scenario. Interest expense relates to a financial decision , which could not be taken under consideration for ROA adjustments.
Moreover, when you get to a Net Incom…
If by return we mean the accounting profit then numerator should be net profit only. Denominator, I feel should be Total Assets as on last year's balance sheet, or perhaps average assets during the year.
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Comment Wall (1 comment)
- At 8:47am on July 31, 2009,
Afsar Shahi said…
- Dear Asif,
If your question is about ratio analysis then the correct formula for obtainig return on asset (ROA) is = (NOI/Total Assets)*100.
Regards
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