Ratio Analysis
Return On Assets - ROA
= |
Net Income + Interest Expense |
|
Total Assets |
Indicates what return a company is generating on the firm's investments/assets.
| Things to remember |
- The ROA is often referred to as ROI ("Return on Investment")
- Interest expense is added to ignore the costs associated with funding those assets.
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[Click
on the buttons above to see the financial statements] |
| For Cory's Tequila Co. |
| $2,096 |
= 0.14 |
| $14,725 |
Return on Assets Analysis:
This is an important ratio for companies deciding whether or not to initiate a new project. The basis of this ratio is that if a company is going to start a project they expect to earn a return on it. This return is the ROA. Simply put, if ROA is above the rate at which the company borrows funds then the project should be accepted; if not then it is rejected. Cory's Tequila Co.'s ROA is 14% - very high, this is over double their cost of borrowing.
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