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, it might seem quite similar but is not. There’s a difference between these two terms.
Return On Assets vs Asset Turnover
The main 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 simply gives an excellent idea to analyst and investors how well a firm uses its resources and assets to maximize the profit graphs. Also, ROA uses the company’s ROE, the debt and some more 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 as well as significant asset purchase in a given financial year.
Comparison Table Between Return On Assets and Asset Turnover
| 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, 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 ratio of asset turnover, 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 the management of a company is efficient in pulling out profits from its resources, which gives a flair idea to analyst and investors.
It’s calculated by dividing the net income by total assets. In basic terms, it tells you a lot about the company, its people, and the management level. It generates revenue from invested capital. ROA is a comparative measure since ROA for a public firm can vary and could 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 as well.
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 the ROA 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 investments that are of high importance. This asset turnover ratio is necessary to measure how much revenue has been generated in a financial year through the beginning assets and ending assets.
The measurement goes with the pointing of assets of a company 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 finding out total sales or revenue of the same financial year, dividing this revenue with the value of the average calculated.
If a company experiences less asset ratio, it reveals that the firm is not efficient in generating revenue out of its values or assets. A large ratio means most of the company’s assets remained with them and made money as well.
Investors analyze this ratio use this 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 that is about the total income and average assets, while the asset turnover is about 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, equity, while asset turnover has not much to do with it.
- The higher the ROA will be, the more its asset efficiency, while the higher asset turnover will be, the higher generation of revenue will be seen.
- ROA is an X- factor to compete with companies of the same industry. It reveals how they use their assets to maximize profits. While the asset turnover ratio is a singleton factor for comparison.
Conclusion
For a company to establish a victory over others, every factor will matter, from the management of employees and investors to achieving targets within a financial year. ROA and asset turnover depict a fair idea of how well management is to increase their sales and generate profits and revenues.
Both ratios are equally crucial to a company. However, these slight differences make it either a bit more valuable than the other. That doesn’t mean the latter one has nothing to do. Both give an idea to managers and investors how well resources are used and how they can be used efficiently.
References
- http://iaeng.org/publication/WCE2008/WCE2008_pp828-833.pdf
- https://link.springer.com/article/10.1023/A:1012430513430