Return On Assets (ROA)

What is Return on Assets (ROA)?

Return on assets (ROA) measures a company’s profitability through assets. ROA gives investors or business managers an overview of how efficiently the company is utilizing its assets to generate earnings.

Calculation

As the definition indicates, the calculation of ROA is a comparison between net income and total assets and it reflects the efficiency of reusing the assets:

• Return on Assets = Net Income ÷ Total Assets

How to Apply ROA?

Similar to ROE, ROA is also a relative valuation measurement — which means that it indicates the most information when compared with similar companies. The reason is that ROA varies according to industries, businesses, and markets, which marks the significance of comparing companies with similar features.

What Does the Value of ROA Tell Us?

Assets are sources that the company is financed, in another word, properties or the investments the company has to run the business. Therefore, a higher ROA is favored, because it implies that the business generates more income with fewer assets, marking a more efficient operation.