What does Return on Asset and Profit Margin mean? What if Company A has higher ROA and lower Profit Margin? :S

Question

Compared to Company B who has a lower ROA and higher Profit Margin??? Which company is doing better???

Answer 1

Return on asset means the margin gained deploying all types of assets (Starting from Land to Cash). For calculation, it is arrived at with a percentage to understand the position better and picturise properly the worth of management of a company or concern.

Margin of profit is clearly the net amount of all incomes and all expenditure (Including provisions, depreciation etc.). For better understanding, it also is translated into percentage.

Return on assets, depend upon various factors or components and kinds of the assets. More costly the asset is, less the return. It is therefore high in service sector than in goods sector.

Margin on profit have two broad segments : Profit before and after tax. Clearly the market looks at PAT for obvious reasons.

Now, a company with good ROA and less PAT might be capital intensive ,whereas the opposite is service intensive or labor intensive.

Answer 2

Return on assets (ROA) ratio tells how well management is utilizing all the company's resources (assets). It is calculated by dividing net profit (before taxes) by total assets.  The number will vary widely across different industries. Capital-intensive industries such as railways will yield a low return on assets, since they need expensive assets to do business. Service based operations such as consulting firms will have a high ROA: they require minimal hard assets to operate.

We have 2 profit margins

Net profit margin measures how much a company earns (usually after taxes) relative to its sales.  In general, a company with a higher profit margin than its competitor is more efficient, flexible and able to take on new opportunities.

Operating profit margin also known as coverage ratio measures earnings before interest and taxes. The results can be very different from the net profit margin due to the impact of interest and tax expenses.  By analyzing this margin, you can better assess your ability to expand your business through additional debt or other investments

ROA aims to measure how efficiently the business is using its resources. If a business has very low ROA, it may be better off selling off all its assets and invest the money into a high interest bearing account. Furthermore, a low return could become a loss if the business suffers a downturn.