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6
Return on Assets
Overview
Return on assets (ROA) is a type of profitability ratio that measures the profitability of a business in
relation to its total assets. This ratio indicates how well a company is performing by comparing the
profit (net income) it’s generating to the total capital it has invested in assets. The higher the return,
the more productive and efficient the management is in utilizing economic resources. Below is a
breakdown of the ROA formula.
Formula
Interpretation
The ROA formula is an important ratio in analyzing a company’s profitability. The ratio is typically
used when comparing a company’s performance between periods, or when comparing 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.
Typically, different industries have different ROAs. Industries that are capital-intensive and require
a high value of fixed assets for operations will generally have a lower ROA, as their large asset base
will increase the denominator of the formula. However, a company with a large asset base can have
a large ROA, if their income is high enough, it is all relative.
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Financial Ratios
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