Return on assets (ROA)

You may meet return on assets when a lender or buyer reads a seller’s financial statements. BDC notes that capital-intensive industries such as railways will yield a low return on assets, and that service-based operations such as consulting firms will have a high one, as they need few hard assets.

How it is calculated

Statistics Canada’s methodology for its enterprise financial ratios defines return on assets as the ratio of net income to total assets. It defines return on equity separately, as net income to total equity. BDC’s own formula divides earnings after tax by total assets. Check which earnings figure a quoted ratio uses, whether net income or another such as EBIT, before comparing two numbers.

What to check or ask

• Which earnings figure sits on top, and whether the asset total is a year-end balance or an average
• Whether the same formula was used for the business and for any industry figure it is compared with
• Whether the assets are ones the business will actually keep, such as equipment under lease or owned by the seller personally

The wider picture of what a buyer reads is in what buyers look for in your financial statements.