Return On Assets (ROA)

Profitability ratios Print Email

Definition

Return on assets (ROA) is a financial ratio that shows the percentage of profit that a company earns in relation to its overall resources (total assets). Return on assets is a key profitability ratio which measures the amount of profit made by a company per dollar of its assets. It shows the company's ability to generate profits before leverage, rather than by using leverage. Unlike other profitability ratios, such as return on equity (ROE), ROA measurements include all of a company's assets – including those which arise from liabilities to creditors as well as those which arise from contributions by investors. So, ROA gives an idea as to how efficiently management use company assets to generate profit, but is usually of less interest to shareholders than some other financial ratios such as ROE.

Return on assets gives an indication of the capital intensity of the company, which will depend on the industry. Capital-intensive industries (such as railroads and thermal power plant) will yield a low return on assets, since they must possess such valuable assets to do business. Shoestring operations (such as software companies and personal services firms) will have a high ROA: their required assets are minimal. The number will vary widely across different industries. This is why, when using ROA as a comparative measure, it is best to compare it against a company's previous ROA figures or the ROA of a similar company.

Calculation (formula)

Return on assets is calculated by dividing a company's net income (usually annual income) by its total assets, and is displayed as a percentage. There are two acceptable ways to calculate return on assets: using total assets on the exact date or average total assets:

ROA = Net Income after tax / Total assets (or Average Total assets)

Instead of net income, comprehensive income can be used as the formula's numerator (see statement of comprehensive income).

Exact Formula in the ReadyRatios Analytic Software

ROA (net profit version) = F2[ProfitLoss]*(365/NUM_DAYS)/((F1[b][Assets] + F1[e][Assets])/2)

ROE (comprehensive income version) = F2[ComprehensiveIncome]*(365/NUM_DAYS)/((F1[b][Assets] + F1[e][Assets])/2)

F2 – Statement of comprehensive income (IFRS).
F1[b], F1[e] - Statement of financial position (at the [b]eginnig and at the [e]nd of the analizing period).
NUM_DAYS – Number of days in the the analizing period.
365 – Days in a year.

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