What is ROA? This is a question asked by many businesses. In the following article, Viindoo will help businesses learn about the concept of ROA, how to distinguish between ROA and ROE and the relationship between these two indicators. Follow along with us.
1. What is ROA?
ROA (short for Return On Assets) is defined as the rate of return on the total assets of a business. This is an indicator that managers are interested in analyzing the profitability of the total assets of the enterprise. Thanks to that, managers can assess whether the business is on the right track or not and make appropriate adjustments and development strategies.
Return On AssetsHere is the formula for calculating ROA:
ROA = (Net profit or profit after tax / total assets of the business) * 100%
In there:
- Net profit is calculated as net profit minus tax.
- Total assets include all capital used by the business, including equity and debt capital (total assets = equity + debt).
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2. What is ROE?
ROE (short for Return On Equity) is defined as the rate of return on equity. This index helps business owners realize the profitability of the total equity invested. The higher this index, the better the profitability of the enterprise's capital efficiency.
ROEThe formula for calculating ROE:
ROE = (Net Profit / Equity) * 100%
In there:
- Net profit is profit after deducting taxes
- Equity is the capital invested by the business owner, excluding borrowed capital.
3. Compare the pros and cons of ROA and ROE
Here are the pros and cons of both ROA and ROE metrics:
| Compare ROA and ROE | ROA | ROE |
| Advantages | - Simple, easy to use, easy to use - Evaluate the performance of the business. | - Easy to calculate, easy to use. - Evaluate the return on equity. |
| Disadvantages | - Only shows a part of corporate finance, not the whole picture. - It can only be compared with businesses operating in the same field. - Not effective if only calculated for a short time. - Companies can misuse ROA to cut, and inflate benefits. | - May not be stable. - Increases when the owner buys back his shares in the market. - It is not enough to be able to assess the capacity of a business. |
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4. Relationship between ROA and ROE
ROA and ROE are two indicators that have an inseparable relationship. When considering the financial position of a business, investors need to pay attention to both indicators to make the most accurate assessment.
Relationship between ROA and ROEHere are some examples to make this relationship clearer:
Two enterprises A and B have equity of VND 20 billion and VND 30 billion, respectively. Profit after tax of both is 2 billion and 3 billion respectively. Company A has a debt of 5 billion, company B has no debt.
From the above example, we can see:
- Two companies A and B have equal ROE, both 10%. This shows that the efficiency of using the equity of the two companies is the same.
- The ROA of company A is 8%, and company B is 10%. This difference is because company A has a debt of 5 billion dongs, pushing the total assets of the enterprise to 25 billion. This shows that company B's capital efficiency is better than A's.
4. ROE, ROA how much is good?
According to investor Warren Buffett, a business needs to have an ROE of at least 15% to be considered financially viable. With this ROE level, the enterprise's ROA must be above 15%. However, taking into account the reasons for inflation, Vietnamese investors usually expect an ROE of 20 - 22% and an ROA of 10 - 12%.
According to the assessment, a business is considered to be doing well if it maintains a 10% ROA ratio within 3 years. An increase in this ratio shows that the business performance of the enterprise is good and the assets are being used effectively.
However, whether this index is good or not depends on many other factors such as the field of operation, the capacity of competitors in the same industry, and the business results of the enterprise itself in the past.
Thus, the above article by Viindoo helped businesses answers the question "What is ROA??”, the calculation method, and the advantages and disadvantages of ROA and ROE. Hopefully, this article will help businesses gain more knowledge to evaluate their operations more effectively. If you have any questions, please leave a comment below this article for detailed answers.
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