Return on Assets

Key Question

How efficiently are you utilising assets to generate profits?

Return on Assets-2

This ratio indicates how profitable a company is relative to its total assets. The Return on Assets (ROA) ratio illustrates how well management is employing the company’s total assets to make a profit. The higher the return, the more efficient management is in utilizing its asset base. The ROA ratio is calculated by comparing net income to total assets, and is expressed as a percentage.

Formula: 
Net Income / Total Assets

The need for investment in current and non-current assets varies greatly among companies. Capital-intensive businesses (with a large investment in fixed assets) are going to be more asset heavy (and will therefore have a lower ratio) than technology or service businesses (which will have a higher ratio).

Therefore because businesses require different asset investments that you need to think about how you use the ROA ratio. For the most part, the ROA measurement should be calculated and compared historically for the company being analysed.

If comparisons are made with other companies, ensure that the companies being reviewed are similar in product line and business type.