What differentiates a company from its competitors? It’s the profit ratio and the efficiency of generating revenues from its available assets. But when it comes to return on assets (ROA) and asset turnover, they might seem quite similar but is not. There’s a difference between these two terms.
Key Takeaways
- Return on assets measures a company’s profitability relative to its total assets, while asset turnover measures the efficiency of its asset utilization.
- Return on assets is calculated by dividing net income by total assets, while asset turnover is calculated by dividing revenue by total assets.
- Return on assets reflects how well a company generates profits from its assets, while asset turnover shows how much revenue it generates for each dollar of its assets.
Return On Assets vs Asset Turnover
The difference between the return on assets and asset turnover is that return on assets indicates how well a company efficiently utilizes its resources in terms of profitability. In contrast, asset turnover is a ratio of total sales to average assets.
Return on Assets is the company’s net income divided by the average of total assets. ROA gives an excellent idea to analysts and investors about how well a firm uses its resources and assets to maximize the profit graphs. Also, ROA uses the company’s ROE, debt, and other factors.
The asset turnover ratio reveals the revenue generated through assets. It’s used to measure the efficiency of a company that uses its assets to generate profit. The asset turnover ratio can boom by more extensive sales and significant asset purchases in a given financial year.
Comparison Table
| Parameters Of Comparison | Return On Assets | Asset Turnover |
|---|---|---|
| Definition | Return on Assets is a firm’s total income divided by the average of total assets. | The asset turnover ratio indicates the money or profit generated through assets. |
| Formula | ROA = Net income/Total assets | It’s calculated by dividing total sales with (beginning asset+ ending assets)/2. |
| Indications | Return on assets looks at net income and profits relative to assets. | Asset turnover looks at revenue and not at profits. |
| Ratio-wise | ROA is a profitability ratio that measures the margin of profits for the amount invested in assets. | Asset turnover is the activities ratio. It measures how you can generate revenue from assets. |
| Formula consideration | A higher ROA means more asset efficiency. | The higher the asset turnover ratio, the more a company will experience revenues. |
What is Return On Assets?
Business is all about efficiency. What matters is how you increase your profits from a finite set of assets. It’s an indicator that shows how a company’s management is efficient in pulling out profits from its resources, which gives a flair idea to analysts and investors.
It’s calculated by dividing the net income by total assets. It tells you much about the company, its people, and its management level. It generates revenue from invested capital.
ROA is a comparative measure since a public firm’s ROA can vary and be high depending on the industry.
ROA gives a fair idea to managers how well and compelling the company is in turning the sum or amount invested into its net income. The higher the ROA, the better efficient management is. This also means that a company is well managed to extract net income from fewer investments.
ROA is helpful in comparison with other companies. Since every industry uses its resources differently, resulting in different profit ratios.
For example, the ROA for service-oriented firms, such as banks, will be higher than that of investment-intensive companies, such as utility and construction firms.
What is Asset Turnover?
Revenues are of great use since it reveals the value of a company. Investors also look into the firm and make significant investments.
This asset turnover ratio is necessary to measure how much revenue has been generated in a financial year through the beginning and ending assets.
The measurement goes with pointing a company’s assets on the balance sheet chart at the start of the year and pinning the ending balance or assets at the end of the year. Adding these two values and dividing them by 2 will give us an average value of assets.
Then find out the total sales or revenue of the same financial year, dividing this revenue by the value of the average calculated.
If a company experiences less asset ratio, it reveals that the firm is inefficient in generating revenue from its values or assets. A large ratio means most of the company’s assets remained with them and made money.
Investors analyze this ratio to compare and compete with similar companies. A company’s asset ratio can be changed by more extensive asset sales or significant asset buying in a financial year.
Main Differences Between Return On Assets and Asset Turnover
- The ROA is a ratio of the total income and average assets, while the asset turnover is the sales generated with the average assets.
- ROA is a profitability ratio that indicates the amount or sum generated through its assets available. In contrast, asset turnover is an activity of revenue ratio that shows how much revenue is generated.
- ROA accounts debt value of a company, and equity, while asset turnover has little to do with it.
- The higher the ROA will be, the more its asset efficiency, while the higher the asset turnover will be, the higher generation of revenue will be seen.
- ROA is an X- factor in competing with companies in the same industry. It reveals how they use their assets to maximize profits. At the same time, the asset turnover ratio is a singleton factor for comparison.
- http://iaeng.org/publication/WCE2008/WCE2008_pp828-833.pdf
- https://link.springer.com/article/10.1023/A:1012430513430
Last Updated : 11 June, 2023
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
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The detailed explanations of ROA and asset turnover provide a strong foundation for understanding financial performance. Well done.