Return on Asset (ROA) is a famous ratio in financial statement although it less popular than price to earning ratio (PER). This ratio as complement to make your analystys accurate.

ROA measure return (net equity) relative to asset. This ratio measure the ability of company in converting asset to return.

The formula of ROA is :

ROA = Earning Before Interest and Tax/ Total assets

If you want to separate ROA, you can use the formula below:

ROA = Net Income Margin x Active turnover

ROA = (Net income after tax/Net sales) x (Net sales/total activa)

To count that ratio, you should prepare the data. Net income after tax are in the income statement of company. Below section of the income statement sheet, you can find the item. Net income is the difference sales (revenue) with expenses, tax and interest.

You may also find the denominator too i.e. Total assets. Count both long term asset and short term asset. the example of fixed assets is furniture, building. vehicles, office, and land. Meanwhile the short term asset is raw material and inventory. Then you just divide the net income with total assets.

For example, a company has reported net income after tax $ 10,000 millions; meanwhile, the asset is $ 100,000 millions. The ROA is ( $ 100,000 millions/$ 10,000 millions ) or 10.

The great company has ability to convert their asset as consequently thye have great ROA. The higher ROA. the better.

You should know that some industry has higher ROA than other industry. For, example the mining company's ROA is smaller than the retail company. It occurs because mining company has great asset like drilling equipment, ship, mining, etc. Opening a mining need million dollars and time. Meanwhile, The retail company's asset just building, office, vehicles, etc. Opening a retail shop is cheaper than opening a mining.

The sales of retail is also easy than a mining company. After some years, a mining company might not sell anything because they have yet find any precious product.

You should compare ROA company in same industry. comparing between cross industry is usefulness and can even be mistakes. Compare an apple with an apple.

Beside the industry, the ROA also depend on country, over time, economic climate, etc. Today, we side with great depression threat. I believe most ROA company is decreasing because the sales is also decreasing.