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Operating Performance and Return on Assets

Profits are an important indicator of success, but we also need to consider how much was invested to generate those profits. For example, profits of a million dollars are not so impressive if the firm invested a trillion dollars to earn them. Shareholders expect managers to use their resources efficiently. If the firm is not generating an acceptable rate of return on the resources made available to them, then they need to redeploy them to some other use. If the firm has no better uses, then they should return the resources to shareholders (via dividends or stock repurchases) and let the shareholders invest them elsewhere.

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Return on Assets (ROA) is an important performance measure that helps determine the amount of resources being used to generate profit. Discover how to calculate ROA, evaluate it, and ways to improve it.