Return on Assets (ROA)

Definition

Return on Assets is a profitability measurement that looks at the amount of resources (e.g. office equipment, real-estate, machinery, etc...) that are required to support running the business. ROA is a leading indicator of managements effectiveness in generating profits from a company's assets.

Calculation

Return on Assets = Net Income / Total Assets

Let's say Company A has a net income of $1000 and total assets of $15000.

$2500/$15000= 16.67% ROA. This means that Company A is earning 16.67% on its assets.

Why is this important?

The return on assets ratio shows how efficient a company is at using its assets to generate a profit. Generally, the higher to ROA the more profitable the company is.

How do I know if the ROA is within a good range?

It is best to compare a stocks ROA with other companies that are similar or within the same industry in order to understand if the observed stock's ROA is within range of the industry.

Financial Glossary Reference

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