Return on Assets (ROA)

What is Return on Assets (ROA)?

Return on Assets (ROA) is a profitability ratio that measures how efficiently a business utilizes its assets to generate profit. It is equal to a company's after-tax profits (or net income) divided by its total assets. It is also a metric used to calculate the return or gain from investing in a company's assets.

ROA is particularly useful for comparing companies within the same industry, as it reveals which firms are doing a better job of converting their asset base into earnings. Investors and analysts use ROA alongside other metrics like return on equity and return on invested capital to build a comprehensive picture of a company's financial performance.

How to Calculate Return on Assets (ROA)

The formula to calculate Return on Assets (ROA) is straightforward. It is calculated by taking a company's net income and dividing it by its total assets:

Net income is typically stated on the income statement. Total Assets represents all the resources a company has available to generate net income, as reported on the balance sheet. Both figures need to be on an after-tax basis in order to accurately calculate the return on assets.

What is a Good Return on Assets (ROA)?

A good return on assets is typically higher than the industry average. It is generally accepted that a healthy level of ROA is 9-12%, although this may vary depending on the industry. Asset-heavy industries like manufacturing, utilities, and airlines tend to have lower ROAs because they require significant capital investment. Asset-light industries like software and consulting can achieve much higher ROAs.

It is important to remember that ROA is an indicator of overall efficiency and performance, and should not be used as a replacement for sales or other financial indicators.

ROA Calculator