A company's return on assets (ROA) is a key indicator of the overall productivity of the company, and shows the percentage of profit a company earns relative to its total resources. A negative ROA suggests that a company is not properly utilizing its capital, and may have questionable management.
Return on assets is a financial ratio calculated based on a company's net income divided by the value of its total assets. This ratio shows the business, as well as its investors, what it can do with the assets it has available. A company's assets consist of any debt and equity used to finance the operations of the business. The higher the ROA, the more money a company is making with less capital investment.
When a company has a negative ROA, it means that the company is investing a high amount of capital into its production while simultaneously receiving little income. If a negative ROA is accompanied by high levels of debt, the effect of the negative ROA is magnified. Businesses often decide to increase their debt when they anticipate a positive future ROA -- a potentially risky strategy that can result in management having to explain its decision if ROA turns out to be less than expected or, worse, negative.
ROA can have an impact on other financial ratios, specifically the return on equity (ROE). The return on equity is essentially ROA magnified by debt, which can be seen when an equity mutliplier formula is used, where ROE equals ROA times the equity multiplier. The higher a company's debt ratio -- contained in the equity multiplier -- the more ROA is leveraged to produce a high ROE. Because ROA is multiplied by the equity multiplier, a negative ROA also results in a lower ROE.
Like any financial indicator, ROA is most useful when it is used to compare companies within the same industry, or ideally with the same level of market capitalization -- often interpreted as a valuation of net worth. A company that is capital intensive, such as a computer manufacturer or construction company, will always have a lower ROA relative to companies that rely on intellectual versus physical capital. Businesses with a negative ROA, however, may need to consider altering their debt and equity usage, or a restructuring of management.