Return on Assets (ROA) is a type of return on investment (ROI) metric that measures the profitability of a business in relation to its total assets. This ratio indicates how well a company is performing by comparing the profit (net income) it’s generating to the capital it’s invested in assets. The higher the return, the more productive and efficient management is in utilizing economic resources. Below you will find a breakdown of the ROA formula and calculation. These profitability ratios are used to measure a company’s performance.

As noted above, one of the biggest issues with ROA is that it can’t be used across industries. That’s because companies in one industry have different asset bases than those in another. So the asset bases of companies within the oil and gas industry aren’t the same as those in the retail industry.

## Return on Assets Formulas

At first glance, Company A might seem like the better investment since it has a higher net income. Under the “Upside Case”, net income increases from $25m to $33m, whereas in the “Downside Case”, net income declines from $25m to $17m. The increase in PP&E sitting on the B/S can be interpreted as increased CapEx spending, which is often caused by lackluster growth and/or increased competition in the market. For the “Total Assets” line item, the balance increases from $270m in Year 1 to $278m in Year 5.

These measurements are indicators of management’s efficiency with asset use. It’s meant to give investors insights into shareholder revenue generation. It measures the percentage of how much income a company’s net operating profit, after taxes, has earned annually on average over three years from all the business operations and investments. 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.

## Balance Sheet Assumptions

Therefore, interest income and interest expense are both already factored into the equation. Calculate and compare the return on assets ratio of the three companies given in the table below. The data in the table is for the trailing 12 months (TTM) and shows the net income and total assets for Company A, B, and C in the retail industry.

Return on assets, or ROA, is a metric used to evaluate how efficiently a company is able to generate profit with the assets it has available. Both ROA and profit margin can be used to show how efficient a company is in terms of its assets and expenses. If the ROA is increasing over time, it means that the company has been using its assets more what is amortization efficiently to produce income. Return on equity (ROE) is a similar financial ratio to ROA, and both can be used to measure the performance of a single company. The money the company earns from selling widgets minus the cost of materials and labor equals its net profit. Divide the company’s net profit by the value of its assets to get ROA.

## What is return on assets?

Under the same time horizon, the “Total Assets” balance decreases from $270m to $262m. But besides comparisons to industry competitors, another use case of tracking ROA is for tracking changes in performance year-over-year.

A ROA that rises over time shows that the company is doing well at increasing its profits with each investment dollar it spends. Whereas, a declining ROA may indicate a company that might have over-invested in assets that have failed to produce revenue growth. The formula for the return on assets is computed by dividing the net income of a company by its total assets. The numerator of the ROA formula can be found at the bottom of a company’s income statement while the denominator of the return on assets ratio formula can be found on the company’s balance sheet.

### What is a good asset ratio?

An asset turnover ratio of over 1 is always considered good. A high ratio means the company is earning more revenue by fully utilising its assets. This implies that the company is generating enough net sales revenue by employing its own resources.