Understanding How Your Return on Assets Reflects Profitability
When your company relies on investors for backing, it is important to show profitability from the start. Even in the startup stage, demonstrated profitability allows investors to understand the risk of backing your company. As your business grows and thrives, your profitability numbers should increase in tandem. To determine your company’s overall ability to generate a profit, you must calculate your return on assets, or ROA. To do so, you just divide your net income by your total assets to find the return percentage you receive for each dollar of assets you own. Here’s how this calculation will help demonstrate the health of your business.
Showcases Asset Strength
A moderate return on assets figure highlights the strength of your machinery, office equipment and other assets in your business operations. Unlike other success indicators, such as margin figures, you do not want your ROA percentage to continually remaining high, especially in comparison to other businesses in your industry. Otherwise, your investors may determine that you do not invest enough back into your business, which can warn of future problems when your assets begin to fail.
Highlights Freedom from Debt
If your Missouri company maintains a balanced return on assets, your investors can conclude that your business currently has the ability to remain out of debt. When your company can demonstrate an ability to generate positive revenues, and remain out of debt, your investors can continue to financially back your company without too much worry about risk.
Indicates Future Ability to Generate Returns
With the ROA figure on hand, investors can determine if your company’s profitability expectations will generate actual returns in the coming years. Your investors may utilize this figure along with return on equity calculations to predict the future financial health of your business operations and adjust their investment strategy in response.
If you need assistance in calculating your return on assets, contact the team at accountRely in St. Louis, MO for assistance. Your accounting professional will use your data to generate the figures you need for optimal success in the business world.