Return on Assets (ROA)
A profitability ratio measuring how efficiently a company uses its assets to generate profit, calculated by dividing net income by average total assets.
Return on Assets
A profitability ratio that measures how efficiently a company uses its assets to generate profit, calculated by dividing net income by average total assets.
For instance, if a manufacturing company generates annual net income of $4 million with average total assets of $40 million, its return on assets would be 10%, indicating it generates $0.10 of profit for each dollar invested in assets.
ROA provides insight into management’s effectiveness at deploying capital to generate earnings, regardless of how those assets are financed. Higher ROA indicates more efficient asset utilization. This metric varies significantly by industry, with asset-light businesses like software companies or professional services firms typically achieving higher ROAs than capital-intensive industries like utilities or manufacturing. Some analysts use operating income instead of net income in the calculation to focus on operational efficiency without the impact of financing decisions and tax situations. ROA is particularly useful for comparing companies within the same industry.