Donald W. Reynolds National Center For Business Journalism

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Exercise: What Do Financial Statements Measure?

March 25, 2016

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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.

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