A key plant metric: ROA
Alex Anderson, contributing editor -- Manufacturing Business Technology, 8/1/2004 6:00:00 AM
As the name implies, return-on-assets, or ROA, gauges how efficiently a company manages to squeeze profit from its assets—the property owned by a concern—regardless of size. High ROA is a sign of solid financial and operational performance, and is generally accepted as a key financial metric.
"It's similar to return-on-investment," explains Debra Hofman, service director for AMR Research's Benchmark Analytix Group in Boston. "You want to get as much value as you can out of the lowest investment possible, so the higher that ratio, the better your return," says Hofman.
Hofman adds that ROA is a good number for determining "what a company can do with what it's got"—i.e., how many dollars of profits it can achieve for each dollar of assets it controls. It is a good way to compare competing companies. However, ROA is a measure that varies widely from one industry to another. It doesn't mean much to compare the ROA of a software company—which has very little capital equipment—with the ROA of an aerospace company that is far more capital-intensive.
Recent research by Hoffman has uncovered a correlation between a company's ROA and its perfect order performance (see MSI, Nov. 2003). The research is part of an ongoing benchmarking study looking into whether companies that operate efficient supply chains also lead in key financial indicators such as profit margins, earnings-per-share, and ROA.
So far, the trends coming out of the research indicate that a 5-percent better perfect order rating correlates to an average 2.5-percent better return-on-assets. Hofman is quick to point out that the sample size is small—less than 20 companies—so the correlation indicates a trend rather than a statistical fact. However, the trend lines were strong enough to be of interest, she says.
"You would expect that the companies that are good at supply chain also are good at other things," she says, adding that this comes from a number of factors, including solid business practices throughout the organization. "Companies that are good at supply chain do a lot of other things right."
