What is a Return on Assets?

Answer:
Return on Assets, or ROA, is an indicator that

gives an idea of how profitable a company is in relation to the company’s total assets. You calculate ROA by dividing the company’s earnings by its assets. The resulting Return on Assets is shown as a percentage.

For example, if a company has assets worth $5 million and a net income of $1 million, $1 million divided by $5 million returns a ROA of 20%.

Compare this ROA to a company with similar earnings and more assets.

If the second company also earns $1 million but has $10 million in assets, the second company’s ROA is only 10%. The first company has the more desirable Return on Assets because they more effectively convert their assets into profits.

Invested capital consisting of both equity and debt are used to finance a company’s operations. A ROA indicates how well the company uses their assets to generate profits. The higher the Return on Assets, the better because high ROAs indicate that the company is effective at making a good profit with a small investment.