| the amount of profit computed by dividing net income before interest and taxes by the cost of assets, usually expressed as a percentage. Abbreviation: ROA |
Return On Assets - ROA
A useful indicator of how profitable a company is relative to its total assets. It also gives an idea as to how well the company is able to use their assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is 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'd like to use operating returns before cost of borrowing.
Investopedia Commentary
ROA tells you what earnings were generated from invested capital (assets). ROA for public companies can vary substantially, but will be dependent on the industry they are in. This is why it is best when using ROA as a comparative measure to compare against a company's previous ROA numbers or the ROA of a similar company.
The assets of the company are comprised of both debt and equity. Both of these types of financing are used to fund the operations of the company. The ROA figure gives investors an idea as to how effectively the company is converting the money they have to invest into net income. The higher the ROA number the better it is seen as the company is earning more money on less invested company. For example if one company has a net income of $1M and total assets of $5M their ROA is 20% however is a company earns the same amount but has total assets of $10M they have an ROA of 10%. Based on this example the first company (ROA of 20%) they are better converting their assets into net income.
Related Links
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Understanding The Subtleties Of ROA Vs ROE
See also: Assets, Du Pont Identity, Earnings, Return on Equity - ROE, Return on Net Assets - RONA
Also spelled: ROA