ROA discussion 1 | Stocks and bonds | Finance & Capital Markets | Khan Academy

One of the listeners failed to speak correctly The concept of return on assets So this video will explore the return on assets On the definition of return on assets If you look up a financial website Or some financial textbooks They will tell you the net income from total assets This is different from what I said Other sources such as Wikipedia will tell you Actually this is just one of the definitions About return on assets Another explanation is net income Abbreviated as NI Net income plus interest So they have to add interest Then subtract tax savings This tax saving comes from interest We can make a whole video To explain the tax savings on interest This will be more obvious When comparing debt financing with equity financing Because of the cost of interest But it also increases the probability of bankruptcy If you issue more debt We can make a series of videos about that But the tax savings on interest divided by the assets This is the definition given by Wikipedia The first explanation I want to give is Operating income of assets I will give another explanation later Because I think it is worth exploring I think this is also a topic often discussed in the financial field There are some formulas for calculating these things People remember these formulas But in the process you also lose a lot of intuitive judgment It is also important to realize these That is, there are many different explanations for the same term So people can confidently say that the return on assets is like this What do you know It must be a good thing To ask what the return on assets means to them I think you will be surprised how many people Can't tell you what ROA really means If i still have time We will talk about the last explanation We call it EBIT This seems like a very strange word for me EBIT divided by assets Just like what you know about EBIT EBIT is the income before interest and taxes are deducted This is actually the same thing Compared with net income plus interest and taxes So it is also the pre-tax asset income divided by the asset These are completely different things You may have said wait a moment if I mentioned net income Let's really talk about it for a while Let's compare EBIT and operating income You might just say that if I mention net income So we should remember that EBIT is only an acronym It means the income before interest and taxes are deducted Let's take a look If our income is 350,000 US dollars We will add tax and interest So we add tax to the profit before tax Plus interest at least in this example We get data on operating income So you might ask Why use the different term EBIT instead Why people don’t use operating income often The reason for this different term is because Sometimes non-operating income So let’s assume that among the $10 million assets I did not mention in the first example Because i don't want to complicate the problem But now I will make the problem a little more complicated Assuming that among these 10 million US dollars of assets 9 million are operating assets They are the core These assets need to be generated Operating income Then you have another $1 million in assets Among these 10 million The company doesn’t need to manage this 1 million They just need to keep May speculate on crude oil prices Or used to hedge other risks Or they simply hold a cash account These assets may generate Non-operating income So you can draw a line for interest income Or investment income Right here Investment income Then the company may make some money there Maybe make $10,000 Of course the line has changed here This becomes $510,000 The tax is 153,000 Net income is 357,000 U.S.

Dollars Because the tax rate is 30% This does make sense, right Here I added an additional 10,000 dollars in income To the end of the term 30% tax will be deducted So it only increased revenue by $7,000 So it became 357,000 dollars But this is the difference Between operating income and EBIT In this example, the EBIT is the operating income plus Investment income Therefore, I will only add some Investment income becomes 1.01 million USD And operating income is $1 million I don’t want to talk about those in the first video That's why I just say business income divided by assets But if you really consider all assets If you assume that there are some assets They are non-operating assets These assets are not used to produce trinkets Or sell gadgets for marketing Or for the CEO's affairs Anyway this will actually produce Non-operating income Therefore, profit before interest and tax is affected So I think the profit before interest and tax is calculated backward Start with net income Plus tax and interest Operating income Count down from the top But in general, if you use EBIT Deduct non-operating income You will get operating income The above is the meaning of EBIT here So you can already imagine EBIT And how I originally defined them Operating income divided by assets There are other sayings before calculating taxes What exactly did your assets do for you? Furthermore, if this is a balance sheet This is the asset here is your liability Debt may be one of them But usually something else You may have loans or other things Then your stock It's important whenever you talk about Any ratio In what environment Do you want to pass the CFA exam Or you want to impress your MBA professor Or you want to get an intuition To help become a better investor If you are an investor You might I want to be the last of the three ROA return on assets tells you How is the company doing profit Against the assets it owns I don't care how they pay Whether there is debt I don't want to consider Are they good at getting low interest rates I don't want to consider Can their CFO get a better interest rate Compared to other CFOs Or they do better than other companies in tax avoidance What I care about is the assets they have How good is the asset operation What kind of benefits they can get So I should divide EBIT by assets Should I divide operating income by assets? If I use one of them as the standard of return on assets Company A is 10% Company B is 15% Then I said what did you learn from it? I don't care Is company B good at Get a lower interest rate Or get some form of government tax relief Or do something full of imagination Use of subsidiary property I just want to know which kind of management is better In terms of asset gains These indicators will tell you Because the indicator or tell you How much operating income is generated Or it tells you What is the profit before interest and taxes In this example EBIT may provide more information Because some income is generated from Non-operating assets So maybe the company holds some shares Some gold or other assets Or the company holds part of the forward contract To hedge against fluctuations in crude oil prices Foreign exchange fluctuations or other risks In general If you want to know what I think is the best return on assets I would say it is EBIT divided by assets This is very similar to operating income divided by assets Now you say Okay Sal, why are other indicators here? Why you don't like them so much Okay, net income to assets ratio I think the reason This explanation exists because One of the net income involves these things Frankly speaking, I don’t seem to pay too much attention to these things But when you talk about income What do you get from assets You still have to pay taxes on the income If you raise money You need to pay some interest So this is why this term came into being Where they actually take the bottom line When people talk about the top line and the bottom line Now you know where these words come from Top line is income It is the top line of the income statement Your bottom line That is the bottom line of the income statement That's where the vocabulary comes from So that an explanation is taken from this Divide them by total assets But why don't I like that The reason is that this explanation cannot distinguish such a situation A company may be better at Tax avoidance or payment Another company is better at Financing from the bank in some way It doesn't really matter I care about assets I only care about the left side Left side of the balance sheet Although we consider Some factors on the other side of the balance sheet E.g Suppose you have two same companies This will be a very interesting example You have a company actually I just realized I have run out of time I will continue to talk about this case in the next video I will talk more Tax saving on debt and interest See you next video

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