Return on Assets

The ability of a company to generate returns on its total assets

ROA Formula

Return on assets (ROA) or return on investments (ROI) measures the profitability of a business in relation to its total assets. This ratio indicates how well a company is performing in making a profit from its liabilities and equity. The higher the return, the more productive and efficient management is in utilizing economic resources.

What is the ROA Formula?

Here is the ROA formula:

ROA = Net Income / Total Assets

ROA In Practice

If a business has a net income of \$10 million in current operations, and possesses \$50 million worth of assets as per the balance sheet, this business has an ROA of 20%. For every dollar of debt and equity the business takes on, it can return 20 cents in net profit (after all deductions).

What is the importance of Return on Assets?

The ROA formula is a vital ration in analyzing a company’s profitability. This ratio can be used when comparing a company’s performance between periods, or between two different companies of similar size and industry. Note that it is very important to consider the scale of a business and the operations performed when comparing two different firms using ROA. For example, a business that are capital-intensive and possessing high value fixed assets will have a higher asset base than a similar business with a lower asset base. Though the two may have a similar income, the business that is more capital-intensive will have a lower ROA due to the larger denominator.

What is Net Income or Net Loss?

Net income is the positive amount realized after deducting all the cost of doing business in a given period. This includes all interest on debt, income tax due to the government, dividends paid to equityholders and all operational and non-operational expenses. Operational costs can include cost of goods sold, production overhead, administrative and marketing expenses, and amortization and depreciation of equipment and property. Also added into net income is additional income arising from investments or those that are not directly resulting from primary operations, such as proceeds from the sale of equipment or fixed assets. Net income/loss is found at the bottom of the income statement and divided into total assets to arrive at ROA.