Question

The startup car rental company 's projected Return on Assets (ROA) is over 200% . How the finance consultant result out for this ratio? why? Investors shall choose this firm for investment or not?

Answer 1

Return on Assets (ROA) is a ratio that indicates the income of a firm relative to it's assets. ROA is determined in the percentage form which indicates that the firm's management is efficient enough to generate income out of limited resources. Higher the ROA means the company is generating enough profit in comparison to it's assets and highlights the efficiency of the company's management.

In the above case, the startup car rental company's projected return on assets (ROA) over 200%. It means company will generate enough income relative to it's wealth. Finance consultant will result out the ratio as the company's management is managing it's assets efficiently. RoA considers the company's debt unlike the return on equity. Therefore, it indicates the true efficiency of management in generating income. Suppose, company has total assets of $1 million and generating $2 million. We will apply the ROA formula as

ROA = (Net Income / Total Assets)*100

ROA = ($2 million / $1 million)*100

ROA = 200%

Thus, investors will choose this firm for investment as it is generating return double the assets. Higher the ratio, higher the profitability and soundness of the company.