This ratio measures the effectiveness to which management is employing the firm’s resources. The ROA measures the return that the company earned on its assets; it does not measure the return earned by an investor. Low ROA might indicate poor management ability. Low ROA may also indicate that further analysis of the firm’s assets might reveal inefficient assets which can be disposed of and converted to cash.

Operations

Gross Profit Margin

This ratio indicates the % of gross profit that is earned on each dollar of sales. The gross profit margin for a firm should be compared to the industry averages.

Net Profit Margin

This ratio indicates the % of net profit that is earned on each dollar of sales. The higher the net profit margin the better the ratio is considered to be. Low profit margins can be an indication of a highly competitive industry structure. Low profit margins indicate that the firm should increase its sales, decrease its costs, or both. Profit margin ratios should be based on the net income from continuing operations in order to accurately reflect the firms probable profitability into the foreseeable future.

Resources

Asset Turnover