Profitability ratios - Return on Assets

Return On Assets (or ROA for short) is an indicator informing the user about how profitable a company is relative to its total assets. It tells the user how effective a business has been at putting its assets to work.

In other words, the ROA is a test of capital utilization, that is how much profit (after interest and income tax) a business earned on the total capital used to make that profit.

Note :- This number tells that what the company can do with what it has ,i.e. how many rupees of earnings they derive from each rupees of assets they control. It's a useful number for comparing competing companies in the same industry.

Return on Assets = Net Profit (After Tax) / Total Assets

ILLUSTRATION:-

There is unaudited financial results for the quarter/half year ended 30, Sept 2010 and Balance Sheet also of NTPC Ltd.:-

From the above the information we have following details:-

Net profit (After Tax) = 210738

Total Assets = 11918839 (Fixed Assets + Investments + Current Assets, Loans & Advances + Deferred Expenses)

Return on Assets = Net Profit (After Tax) / Total Assets

So, Return on Assets = 210738 / 11918839 = .017 or 1.7%

Analysis:-

Return on Assets is .017 means, Company is generating Rs. .017 earnings from its every rupees of its assets they control.