Return on Assets ROA Meaning, Formula, & Ratio

It shows the company is becoming more productive and profitable if its ROA is increasing over time. The most straightforward approach is comparing the company’s current ROA to the industry average. This reveals if the company is above, below, or on par with competitors in terms of asset profitability. An above-average ROA suggests strong execution and potential competitive advantages, while a below-average ROA indicates possible issues turning assets into profits versus peers.

How to Find Return on Assets?

ROA is not a useful tool for comparing different sized companies or companies that aren’t in similar industries. Expected ROAs might vary even among companies of the same size in the same industry, but are at different stages in their corporate lifecycles. Explore Strategic Financial Analysis—one of our finance and accounting courses—to learn how to leverage financial insights to drive strategic decision-making. If you want to get a jumpstart, download our free financial terms cheat sheet to strengthen your financial fluency. This simple “bang-for-the-buck” approach highlights why ROA is a widely used measure of business efficiency. These insights can help investors make informed decisions about which stocks to buy or avoid.

Return on Assets (ROA) : Meaning, Importance, Formula & Examples

Companies with high debt may have lower ROA ratios, even if they are profitable. Additionally, ROA does not consider the depreciation of assets, which can distort the ratio, particularly for firms with significant fixed assets. Therefore, when looking at ROA, the numerator (return) would stay the same, but the denominator (assets) would increase. Taking on debt changes a company’s assets via the cash they accept and a company’s liabilities via the obligation. Therefore, ROE remains unchanged when a company takes on debt, while a company’s ROA likely decreases. Similarly, comparing the return on assets for a company that’s focused on increasing its savings versus a company that’s investing in its growth doesn’t hold much value.

Dependent on Accounting Methods

Financial institutions often use ROAA to gauge financial performance. The ROA figure gives investors an idea of how effective the company is in converting the money it invests into net income. The higher the ROA number, the better, because the company can earn more money with a smaller investment. The ROA is a ratio commonly expressed as a percentage that compares a company’s net income with its assets.

Calculating Return on Assets (ROA)

• A company with high debt might have a strong ROA but still face financial risks.
• Here, these figures suggest that for every ₹1 invested in assets, alpha, beta, and gamma have earned ₹0.50, ₹0.30, and ₹0.167, respectively.
• Our intuitive software automates the busywork with powerful tools and features designed to help you simplify your financial management and make informed business decisions.
• The answer to what constitutes a “good” ROA can vary depending on the industry, the economic environment, and the company’s stage in its life cycle.
• Firms investing in more tangible assets usually achieve lower returns than organisations using intangible assets to generate greater returns on assets.

For example, investors can compare ROA to the interest rates companies pay on their debts. If a company is squeezing out less from its investments than what it’s what does roa stand for in finance paying to finance those investments, that’s not a positive sign. By contrast, an ROA that is better than the cost of debt means that the company is pocketing the difference. ROA is commonly used by analysts performing financial analysis of a company’s performance.

• Secondly, evaluating ROA trends helps identify promising stock opportunities that are improving asset productivity.
• Explore comprehensive analyses, historical data, and compare the company’s ROA against competitors.
• ROA can vary significantly between industries due to different asset structures and operational requirements.
• By analyzing ROA and ROE together, you can see how much debt impacts profitability.

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Though ROA is a helpful calculation, it’s not the only way to measure a company’s efficiency and financial health. A company’s ROA is influenced by a wide range of additional factors, from market conditions and demand to the fluctuating cost of assets that a company needs. ROA should be used in concert with other measures, like ROE, to get a full picture of a company’s overall financial health. Once you’ve determined the average value of a company’s assets, divide net profit by average assets and multiply it by 100 to get the percentage. A more nuanced approach is comparing the company’s ROA to the ROA of select competitors, especially those identified as direct rivals vying for the same market share.

The main difference between ROA and ROE lies in how the company’s debt is accounted for. Shareholder equity and total assets will be equal without debt, making ROA and ROE the same. Understanding the ROA of a company is crucial because investors wish to know how well a company can convert its assets into earnings. Moreover, a lower return on assets helps a company identify deficiencies and work on them accordingly.

A falling ROA indicates that the company might have overinvested in assets that have failed to produce revenue growth. ROA can also be used to make apples-to-apples comparisons across companies in the same sector or industry. Assets are now higher than equity, and the denominator of the return on assets calculation is higher because assets are higher, assuming returns are constant. A similar valuation concept is a return on average assets (ROAA), which uses the average value of assets instead of the current value of the item.

A higher ROA indicates better management, strong pricing power, cost controls and other factors that lead to higher efficiency. As the name implies, return on assets (ROA) measures how efficiently a company can squeeze profit from its assets, regardless of size. In this article, we’ll discuss how a high ROA is a tell-tale sign of solid financial and operational performance. Return on assets (ROA) is a profitability ratio that measures the rate of return on resources owned by a business.

However, it is not the only relevant metric, and investors should make sure to look at the full picture when they compare different companies. Average total assets is considered a more accurate measure than simply using the total assets at the end of the latest period. That’s because a company’s assets can vary over time due to the purchase or sale of vehicles, land, or equipment, as well as inventory changes or seasonal sales fluctuations.

Income statements reflect financial performance over a fiscal year, while balance sheets present a snapshot of a company’s capital structure at a specific time. Comparing profits to revenue is a useful operational metric, but comparing them to the resources a company used to earn them displays the feasibility of that company’s existence. Return on assets is the simplest of these corporate bang-for-the-buck measures. Assets are always equal to liabilities plus equity on the balance sheet.

Our team is ready to learn about your business and guide you to the right solution. All programs require the completion of a brief online enrollment form before payment. If you are new to HBS Online, you will be required to set up an account before enrolling in the program of your choice. Harvard Business School Online’s Business Insights Blog provides the career insights you need to achieve your goals and gain confidence in your business skills. The data in this table is accurate as of Jan. 31, 2025, according to Macrotrends. This also helps clarify the different strategic paths companies may pursue—whether to become a low-margin, high-volume producer or a high-margin, low-volume competitor.

It is one of the different variations of return on investment (ROI). It measures the level of net income generated by a company’s assets. Both ROA and return on equity (ROE) are key profitability ratios, but they focus on different aspects of a company’s financial performance. Return on assets (ROA) is a financial ratio that calculates the profitability of a business in relation to its total assets. This ratio is often used to assess how effectively a company is using its assets to generate profit.

Goodwill from acquisitions, representing the excess purchase price over tangible asset values, is excluded from ROA calculations. This omits a major capital allocation element and overstates true economic returns on invested capital. Acquisitive companies with substantial goodwill get a free ROA pass. A similar valuation concept used by financial institutions is the return on average assets (ROAA). The higher the ROA percentage, the better, because it indicates a company is good at converting its investments into profits. As a general rule, a return on assets under 5% is considered an asset-intensive business, while a return on assets above 20% is considered an asset-light business.

Competitive analysis analyses a company’s ROA relative to industry peers through comparative analysis and industry benchmarking. Using time series and competitive benchmarking provides a complete picture of a company’s ROA performance. Whenever analyzing a company’s ROA, it’s important to compare it to competitor ROAs and the company’s own historical ROA over time. This provides context for judging the company’s current asset utilization. It indicates management is becoming less efficient at wringing profits from assets; suppose Company A’s ROA has declined from 15% to 10% over the past few years.

Ed’s balance sheet should reveal why the company’s return on equity and return on assets were so different. The carpet maker carried an enormous amount of debt, which kept its assets high while reducing the proportional amount of shareholders’ equity. In 2024, it had total liabilities that exceeded $422 billion—more than 16 times its total shareholders’ equity of $25.268 billion.

A company’s return on assets isn’t something to be understood at a glance. To properly understand the return on assets metric, you need to look at the company’s balance sheet and income statement. Since their inventory is always changing, they start by calculating their average total assets. They crunch the numbers and find an average total assets value of $200,000. Next, they check their income statement and see they recorded $50,000 in profit for the year.