What Is Return on Assets (ROA)?
ROA refers to a financial ratio that indicates how profitable a company is in relation to its total assets.
ROA is used to determine how efficiently a company uses its assets to generate a profit. The metric is commonly expressed as a percentage by using a company’s net income and it’s average assets.
A higher ROA means a company is more efficient and productive in generating profits.
Key Takeaways
- You can calculate a company’s ROA by dividing its net income by its total assets.
ROA = Total Assets/Net Income
- It’s always best to compare the ROA of companies within the same industry because they share the same asset base.
- ROA factors in a company’s debt, while Return on Equity does not.
ROA vs. Return on Equity (ROE)
Both ROA and ROE measure how well a company utilizes resources.
The difference is:
- ROA factors in how leveraged a company is and how much debt it carries.
- ROE only measures the return on a company’s equity without considering its liabilities.
How ROA is Used by Investors
ROA can be used to indicate how well a company is increasing profits on each dollar it spends.
A falling ROA can indicate over-investment in assets to produce revenue growth.
What Is Considered a Good ROA?
- 5% is considered good.
- Over 20% is excellent.
It’s worth comparing ROAs within the same sector.
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