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.
- Asset performance measures a firm's ability to generate profits or returns from the assets held on its balance sheet.
- Asset performance is typically used to compare one company's performance over time or against its competition.
- Producing strong asset performance is one of the criteria used for determining whether a company is considered a good investment by analysts.
- ROA is the most widely-used metric for measuring a company's 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.