| return on assets (ROA) See return on investment. |
What Does Return on Assets (ROA) Mean?
An indicator of how profitable a company is relative to its total assets. ROA provides an idea of how efficient management is at using its assets to generate earnings. It is calculated, as shown here, by dividing a company's annual earnings by its total assets, with ROA displayed as a percentage. Sometimes this is referred to as return on investment.
Note: Some investors add interest expense back into net income when performing this calculation because they would like to use operating returns before the cost of borrowing.
Investopedia explains Return on Assets (ROA)
ROA shows earnings that are generated from invested capital (assets). ROA for public companies can vary substantially and is industry-specific. Thus, when one is using ROA as a comparative measure, it is best to compare it with a company's previous ROA numbers or the ROA of a similar company. A company's assets consist of both debt and equity, which are used to fund the operations of the company. ROA gives investors some idea of how effectively the company is converting the money it has into net income. The higher the ROA, the more a company earns on a smaller investment. For example, if one company has a net income of $1 million and total assets of $5 million, its ROA is 20%. If another company earns the same amount but has total assets of $10 million, it has an ROA of 10%. In this scenario, the first company is doing a better job of converting its investments into profit. When one thinks about it, this is management's ultimate job: to make wise choices in allocating company resources. Anybody can make a profit by throwing a ton of money at a problem, but very few managers excel at making large profits with a small investment.
Related Terms:
• Assets
• Earnings
• Profitability Ratios
• Return on Equity—ROE
• Return on Net Assets—RONA
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