Given that ABC Corp’s assets represent wealth controlled by ABC and net earnings represent wealth created during the year, you could form a ratio of net earnings ÷ total assets, which is one version of a popular ratio: Return on Assets or ROA (warning: different acceptable methods exist to calculate this ratio). ROA would help you assess whether a firm such as ABC can generate a high return (create wealth) from its assets (wealth level). To start generating questions as a reporter, this ratio could be:
- Compared to ABC’s prior year performances to assess trends
- Compared to ABC managements’ expectations to assess whether they met their goals
- Compared to competitors
- Compared to analyst forecasts to assess whether ABC’s management met analysts’ expectations
As an example, for the years 2014 and 2015, Southwest Airlines generated a return on assets of 5.8% and 10.2% while Delta Airlines generated 1.2% and 8.5%. Over the years, Southwest often generates a higher ROA than competitors: It seems better able to manage its assets (which are primarily airplanes) to generate higher returns (create more wealth with its assets) than many other U.S. airlines.
