Asset Performance
Asset performance refers to a business's ability to take operational resources, manage them, and produce profitable returns. Ratios such as return on assets (ROA), and other metrics that track how efficiently a firm uses its assets to generate revenue and how efficiently operations are being run, are measures of asset performance. Typically, an improvement in asset performance means that a company can either earn a higher return using the same amount of assets or is efficient enough to create the same amount of return using fewer assets. Analysts use metrics like the cash conversion cycle, the return on assets ratio, and the fixed asset turnover ratio to compare and assess a company's annual asset performance. > Return on Assets (ROA) = EBIT/Total Assets This is a pure measure of the ability of a company to generate returns from its assets without being affected by management financing decisions.
What Is Asset Performance?
Asset performance refers to a business's ability to take operational resources, manage them, and produce profitable returns. A business can coax a positive performance out of its assets resulting in positive company performance.
Ratios such as return on assets (ROA), and other metrics that track how efficiently a firm uses its assets to generate revenue and how efficiently operations are being run, are measures of asset performance.
Understanding Asset Performance
Asset performance refers to the way a business can manage the use of its operational resources. Certain metrics and ratios can measure the use of resources. Analysts rely on these metrics and ratios to compare the asset performance of many companies across the same industry. Analysts use metrics like the cash conversion cycle, the return on assets ratio, and the fixed asset turnover ratio to compare and assess a company's annual asset performance.
Typically, an improvement in asset performance means that a company can either earn a higher return using the same amount of assets or is efficient enough to create the same amount of return using fewer assets.
Return on Assets (ROA)
The most common way to determine a firm's asset performance is to look at its return on assets (ROA). ROA looks at the net income reported for a period and divides that by total assets. To measure total assets, calculate the average of the beginning and ending asset values for the same time period.
Return on Assets (ROA) = Net Income/Total Assets
Some analysts take earnings before interest and taxation (EBIT) and divide them by total assets:
Return on Assets (ROA) = EBIT/Total Assets
This is a pure measure of the ability of a company to generate returns from its assets without being affected by management financing decisions.
What Is a Good ROA?
Whichever method you use, the result is reported as a percentage rate of return. A return on assets of 20% means that the company produces $1 of profit for every $5 it has invested in its assets. You can see that ROA gives a quick indication of whether the business is continuing to earn an increasing profit on each dollar of investment. Investors expect that good management will strive to increase the ROA — to extract a greater profit from every dollar of assets at its disposal.
A falling ROA is a sure sign of trouble around the corner, especially for growth companies. Striving for sales growth often means major upfront investments in assets, including accounts receivables, inventories, production equipment, and facilities. A decline in demand can leave an organization high and dry and over-invested in assets it cannot sell to pay its bills. The result can be a financial disaster.
Related terms:
Accounts Receivable (AR) & Example
Accounts receivable is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers. read more
Asset
An asset is a resource with economic value that an individual or corporation owns or controls with the expectation that it will provide a future benefit. read more
Earnings Power
Earnings power is a business's ability to generate profit from conducting its operations. read more
Earnings Before Interest and Taxes (EBIT) & Formula
Earnings before interest and taxes is an indicator of a company's profitability and is calculated as revenue minus expenses, excluding taxes and interest. read more
Growth Stock
A growth stock is a publicly traded share in a company expected to grow at a rate higher than the market average. read more
Net Income (NI)
Net income, also called net earnings, is sales minus cost of goods sold, general expenses, taxes, and interest. read more
Profitability Ratios
Profitability ratios are financial metrics used to assess a business's ability to generate profit relative to items such as its revenue or assets. read more
Rate of Return (RoR)
A rate of return is the gain or loss of an investment over a specified period of time, expressed as a percentage of the investment’s cost. read more
Return On Assets Managed (ROAM) Defined
Return on assets managed or ROAM is a measurement of profits shown as a percentage of the capital that is handled. Return on assets managed is calculated by taking operating profits and dividing it by assets, which could include accounts receivable and inventory. read more