What Is ROA in Business (and Why You Should Pay Attention to It)
Reading Time: 6 minutes Assets, gear, and machinery are the bread and butter of any business.
To get the most out of their assets, businesses need to introduce monitoring practices that will help make sure their investments always return the revenue they invested.
In this blog post, we’ll be talking about what ROA in business is and why you should pay attention to it.
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Table of Contents
Return of Assets Explained
Return of assets (ROA) is a performance measure vital for understanding how a business manages its assets to generate profit.
You should measure your ROA to get a clear picture of whether your asset investments are paying off.
For your assets to be profitable, they have to be used effectively at all times. Having low ROA means that the way your business is managing its assets is inefficient.
This has a negative impact on your income.
Calculating your ROA frequently allows you to be aware of your returns and constantly improve your asset management to the benefit of your business.
Neglecting to measure it, on the other hand, leaves you completely oblivious to how well your assets are used, resulting in missed revenue opportunities.
ROA is represented as a percentage. You can calculate it with the help of this formula:
ROA = (net income ÷ total asset worth) x 100
Let’s say you’re running a car dealership or a repair shop.
If you make $50 000 per year and your gear is worth $100 000, that means your ROA would be 50%—in other words, your business earns half of its total asset worth in a year.
Calculating your ROA should be standard procedure for your business.
Tips for Boosting Your Organization’s ROA
Boosting your ROA is rarely a simple thing to do, especially if you’ve only just started tracking it.
Luckily, we’re here to give you some actionable tips that will help you achieve this.
Increase Your Net Income
Increasing the net income of your business will have a great impact on your overall ROA, so improving it is a strategy you should follow.
By increasing the total income you make, your ROA will increase as well.
One of the ways you can achieve this by increasing the number of sales your team closes every year. This boost in revenue numbers will improve the outlook of your ROA.
Another way is to reduce your expenses.
Since your monthly costs are deducted from your income, cutting on them will leave you with more resources for your business.
When the money you save on expenses is equal to an achieved sale, your income grows—and with it, your ROA.
If you’re having a hard time understanding, let’s illustrate that point with this example.
Imagine you run a production line and your net profit ratio is 33%.
If achieving a sale worth $3 ultimately earns you a profit of $1, that means that, by cutting your expenses by a single dollar, you essentially increase your income by an amount that equals $3 earned in sales.
In other words, by cutting your costs, you increase your income as much as you do by securing a sale, thus helping your manufacturing business to go forward.
Therefore, to increase your ROA score, use these tactics to boost your net income.
Make Your Current Assets More Efficient
Improving the efficiency of the assets you already own is critically important for boosting ROA.
You should make a thorough assessment of your current assets and see how you can make them work for you better.
When assets are more efficient, they can do more work at the same time than less efficient ones—and by doing so, they can generate more revenue for your business.
It goes without saying that efficient assets require fewer resources to run and perform their tasks.
Smaller overhead costs improve their financial outlook, which means they are more profitable than less effective assets in this aspect as well.
You should strive to improve the efficiency of all of your assets in order to avoid spending too much of your resources on simply running them.
You don’t have to think too hard to realize how much gear efficiency saves money and improves ROA.
Think of the time there was something wrong with the engine of your car, causing it to burn more fuel than usual.
Every driver knows that by driving an ineffective vehicle, you actually spend more money on gas than you usually would cover the same distance.
In the same vein, making your current assets more efficient is a key part of the plan to increase the ROA of your business.
Reduce Your Base Number of Assets
It’s not difficult to see that reducing the base number of assets you have will help you increase your business ROA.
A large number of base assets incurs many costs that constantly add up and encroach on income.
If you have dozens of expensive assets that need to be maintained and have overhead costs of their own, they can end up costing you a lot of money each month.
To keep those costs as low as possible, reduce the number of base assets you have.
A large number of base assets means a higher value of total asset worth, and a high value of total assets means that your ROA score will be smaller.
To keep that ROA high, strive to have as little base assets as you need to keep a tight, effective business.
To illustrate the importance of this tip, let’s get back to our example with the car repair shop.
As we said, with $50 000 in yearly revenue and $100 000 worth of assets, the repair shop has a ROA of 50%.
If the car shop could reduce the number of base assets to the worth of $70 000, its ROA would rise to 71.4%—which is quite the boost.
Keep in mind that having many base assets has its shortcomings and that reducing their number will give your ROA a positive boost.
Track Asset Management Metrics
Knowing the key asset management metrics and tracking them is one of the most important things to do if you want to achieve a high ROA.
Having a strategy in place that identifies the key asset management metrics is a critical first step towards achieving effective asset management.
Since managing multiple assets that differ from one another is quite a challenge, reading out the right metrics saves you time and makes sure you only work with data that will genuinely inform your decisions.
Asset managers have to know which of their asset metrics are most relevant.
Tracking the correct metrics to monitor your asset management will tell you exactly what to focus on getting the most out of your assets, machinery, or equipment.
When all your assets are fine-tuned, they produce the most profits. Conversely, unattended assets lead to low productivity and a modest ROA.
If you think using asset management software to track metrics isn’t a good idea, think again.
When you can track the right metrics, the reliability of your assets increases anywhere from 35 to 50%, according to a study by ReliabilityWeb.
To achieve a high ROA, your assets must be in top order—and to make sure of that, you need to know which asset metrics make the count.
Conclusion
Introducing a practice of measuring ROA can seem a bit daunting at first.
However, all it takes is little effort, and you will benefit from a deeper understanding of the return you get from your assets, helping you focus your efforts towards improvement and revenue gain.
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Co-Authored With
Joe Peters is a Baltimore-based freelance writer and an ultimate techie. When he is not working his magic as a marketing consultant, this incurable tech junkie devours the news on the latest gadgets and binge-watches his favorite TV shows. Follow him on @bmorepeters
