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Question:

Discuss about the ROA Profitability Of A Company.
 
 

Answer:

The ROA or return on assets indicates the profitability of a company with regard to the total assets. ROA reveals the efficiency of the management regarding employment of its asset for generation of earnings (Tiedemann, Johansson & Wikner, 2016). The ROA is computed through dividing the profit value by the total asset of the company. ROA indicates the amount of earnings generated from the assets. However, the ROA of public companies are highly dependent on industry and can vary considerably.

ROA computation for Inabox Group Limited

ROA formula

2014

2015

2016

Net income / Total assets

6.87%

-1.00%

2.37%

It can be identified from the above table that there is no specific trend of return on the assets of the company. The ROA of the company was 6.87% for the year ended 2014. However, as for the year ended 2015 the company could not generate any positive income that led to negative ROA for the company. Nevertheless, the company was able to improve its position during 2016 and the ROA reached to 2.37% (Annual Reports - Inabox Group, 2017).

Obviously, higher the return better is the company’s position to with respect to the investor’s aspect as it indicates that the company is managing its resources efficiently for generating wealth (Guo & Wang, 2016). The positive ROA reveals that the profit of the company is in upward trend. However, the negative ROA indicated that the company is not able to earn sufficient income out of its assets.

Items form asset category

Asset name

2014($’000)

2015($’000)

2016($’000)

Property, plant and equipment

573

4091

2067

Intangibles

4,336

15,874

13,976

The plant, property and the equipment are carried out in the balance sheet at the historical value reduced by the depreciation and the impairment loss, if any. In addition, profits and losses between the carrying amount and clearance proceeds are taken to gains or losses. On the contrary, estimated lives of these finite intangible assets are result of technological innovation or any other event.

Intangibles assets those have finite useful life are amortized on straight-line method and spread over the useful life of the asset.  At the end of the each reporting period, the intangible assets are reviewed for the purpose of impairment and adjustments are made accord. The other changes in the patterns of consumption are prospectively accounted for the changing amortisation period.

Items from income statement

Item name

2014($’000)

2015($’000)

2016($’000)

Revenue

46,910

64,328

88,005

Finance cost

48

703

352

Revenue – the revenues of the company includes the revenue from sales and is recognized only after it is established that economic benefit will be generated for the company and it is possible to measure the revenue reliably. The accounting policies are guided by those unbilled products and services that are to be sold separately or in bundled packages to be accrued at the end of each year and revenue billed in advance provide in future is termed as liability.

Finance cost – the financial cost of the company that are attributable to the qualifying assets are capitalized as asset part. However, all the other finance costs under the period are expected for which they are incurred (Bodie, 2013).

Performance rating of the company

2014 – As the performance of the company with regard to 2014 were good, it can be rated as 8 out of 10

2015 – As the company were not able to generate the positive income, it will be rated as 1 out of 10

2016 - As the performance of the company with regard to 2016 were satisfactory, it can be rated as 5 out of 10

 

References

Annual Reports - Inabox Group. (2017). Inabox Group. Retrieved 14 September 2017, from https://inaboxgroup.com.au/investor-centre/annual-report/

Bodie, Z. (2013). Investments. McGraw-Hill.

Guo, C., & Wang, Y. (2016). Market orientation, distributor relationship, and return on assets: Optimizing distribution performance for industrial firms. Asia Pacific Journal of Marketing and Logistics, 28(1), 107-123.

Tiedemann, F., Johansson, E., & Wikner, J. (2016). Strategic lead-time implications on return on assets. In 23rd EurOMA Conference, June 17-22, 2016, Trondheim, Norway Accounting .

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