What is Return on Assets – ROA
Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA gives a manager, investor, or analyst an idea as to how efficient a company’s management is at using its assets to generate earnings. Return on assets is displayed as a percentage and its calculated as:
ROA = Net Income / Total Assets
Note: Some investors add interest expense back into net income when performing this calculation because they’d like to use operating returns before cost of borrowing.
Sometimes, the ROA is referred to as “return on investment”.
ROA is most useful for comparing companies in the same industry, as different industries use assets differently. For example, the ROA for service-oriented firms, such as banks, will be significantly higher than the ROA for capital intensive companies, such as construction or utility companies.