Return on Assets (ROA)

What is Return on Assets?

Return on Assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA gives a manager, investor, or analyst an idea as to how efficient a company's management is at using its assets to generate Earnings.

The higher the return, the more productive and efficient management is in utilizing economic resources. The return on assets ratio, often called the return on total assets, is a profitability ratio that measures the net Income produced by total assets during a period by comparing net income to the average total assets.

In other words, the return on assets ratio or ROA measures how efficiently a company can manage its assets to produce profits during a period.

ROA Formula

Return on assets is displayed as a percentage and its calculated as:

ROA = Net Income/ Total Assets

OR

ROA = Net Income/ End of Period Assets

In basic terms, ROA tells you what earnings were generated from invested Capital (assets).

ROA Calculation Example

Just from the above example, lets take a look at the example of Returns of Assets:

Let's consider your business is in the medical Industry, and the average ROA is 20.00%. Your business, XYZ Company, has a net income of Rs.25,00,000. Your total assets equal Rs.1,00,00,000.

ROA = Net Income / Total Assets

25% = 25,00,000 / 1,00,00,000

Your ROA is 25%, which is slightly above the industry average of 20.00%.

If you want to increase your ROA, your net income and total assets must increase to equal similar values.

Advantage of ROA

• The ROA percentage indicates how well your business manages its Balance Sheet to generate profits.
• Comparing your business ROA with other business can help you determine your current position and potential future growth.
• ROA helps to improve future business performance (e.g., increasing profits).
• It gives investors an idea of how well your business converts money into income.