Guide to ROA: How to Use Return on Assets

Return on Assets (ROA) is a profitability ratio companies use to determine their profitability relative to their total assets, or the amount of money the institution has invested in doing business. The ROA formula compares a company’s total assets (found on its balance sheet) with its net income (found on its income statement) over a given period. A ROA calculation gives investors an indication of how efficiently a business uses its invested capital and assets.

Return on assets allows a business owner, economist, investor, or accountant to assess the capital employed by a particular firm to produce income. It’s essential to gauge a company’s management of its assets to generate revenue and may make a difference between an investor or client working with a particular company or not.

Return on assets and return on investment are two profitability ratios with a critical difference:

• ROA: Return on assets compares a company's total assets against its net income over a period.
• ROI: Return on investment is a similar financial ratio that only considers the income generated by one specific investment relative to its cost.

Return on equity is another measure of profitability that divides net profit by shareholders’ equity. Companies and investors can use the ROE calculation to compare the financial performance of similar companies.

To calculate the return on assets, divide a business's net earnings by the company’s assets on its balance sheet. The higher the ROA number, the more efficiently a business generates profit from its assets.

The return on assets formula is: Return on Assets = Net Income / Total Assets.

Consider this example of return on assets: If Theo purchased a wheeled ice cream cart and an ice cream maker for $1,400 and earned $140 selling ice cream in the park in a month, the simplified ROA would be 10%.

Anything over five percent indicates a good ROA, and anything above twenty percent is excellent. This metric helps compare the profitability of different companies within a similar industry. One business may have a higher net income than its competitor. Still, if they have a lower return on assets, they are less efficient at generating income than a competitor with a higher return on assets.

This calculation is not as accurate when comparing companies in different fields. Calculating return on assets across industries can be unreliable because different industries have varying asset turnovers and requirements. For example, industries that require several assets to operate, like airlines, generally have a lower ROA than companies with fewer physical assets, like software companies.

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