18 Questions
What does a higher return on assets value indicate about a business?
That it is more profitable and efficient
Why should ROA not be compared across industries?
Because companies in different industries use assets differently
What can be inferred about a company with a return on assets of 3%?
That it is an asset-intensive company
What is an example of an asset-intensive company?
An airline company
What is the general rule for determining an asset-light business based on ROA?
A return on assets above 20%
Why is ROA useful for comparing companies within an industry?
Because companies within an industry use assets similarly
What does a high net profit margin indicate about a company's performance?
Strong pricing strategies and efficient management of costs
What is the formula to calculate net profit when given the net profit margin and revenue?
Net Profit = Net Profit Margin * Revenue
What does the return on assets (ROA) measure?
The company's ability to utilize its assets
Why is operating income used instead of income after tax when calculating ROA?
Because asset utilization pertains to the operations of the company
What is the purpose of comparing ROA across industries?
To evaluate the performance of a company relative to its industry peers
What is the benefit of efficient asset utilization?
Lower costs and higher returns on investment
What is the formula for calculating ROA?
Net Income / Average Assets
If a company has a ROA of 15%, what does it indicate?
The company is asset-light and earns 15 cents per dollar of assets
What is the main purpose of using ROA in profitability analysis?
To evaluate the company's asset utilization efficiency
Which of the following industries is likely to have a lower ROA?
Airlines
What does a ROA of 3% indicate about a company's performance?
The company is asset-intensive and relatively unprofitable
What is the general guideline for classifying a company as asset-intensive or asset-light based on its ROA?
ROA below 5% is asset-intensive, above 20% is asset-light
Learn about the importance of Return on Assets (ROA) in evaluating a company's profitability and efficiency. Understand how to use ROA to compare performance between companies, and the limitations of comparing ROA across industries.
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