The Return on Assets calculator (ROA) is a financial metric used to assess a company’s profitability of total assets. This metric tells you how effectively your company uses resources (assets) to generate profit.
Calculate Return on Assets (ROA)
Return on Assets Formula
ROA = Net Income / Total Assets x 100
Net Income: The profit earned after all expenses are paid.
Total Assets: Total dollar value of everything the company owns.
What is a good Return Ratio?
A higher ROA is generally considered better, but a “good” ROA can vary depending on the industry. For example, an asset-heavy industry like manufacturing may have a naturally lower ratio than a service-based industry. It’s important to compare a company’s ROA to historical performance or industry benchmarks.
Net income represents the company’s profit after all expenses have been paid. On the income statement, net income is usually the last line item.
Identify Total Assets
Total assets represent the total dollar value of everything a company owns. This includes cash, inventory, property, equipment, and intangible assets like patents.
Calculate the ROA Ratio
Once you have both figures, you can use the following formula to calculate ROA = Net Income / Total Assets x 100.
Interpret the ROA
A higher ROA generally indicates better efficiency in using assets to generate profits. However, it’s important to consider industry benchmarks when interpreting ROA.
Difference between ROI and ROA
ROI and ROA are both financial metrics used to assess performance, but they measure different things:
ROI (Return on Investment): Measures the profitability of a specific investment. It tells you how much return you get for your money on a particular project or venture.
ROA (Return on Assets): Measures a company’s overall efficiency in using its assets to generate profit. It shows how well the company is squeezing profits out of everything it owns.
Here’s a table summarizing the key differences:
Feature
ROI (Return on Investment)
ROA (Return on Assets)
What it Measures
Profitability of a specific investment
Overall efficiency in using assets
Focus
Return for a particular project
Company’s ability to generate profit from assets
Formula Typically Used
(Gain from Investment – Cost of Investment) / Cost of Investment
Net Income / Total Assets
ROI and ROA comparison
Why ROA Matters?
Financial metrics like Return on Assets are crucial for spotting strong investments. Here’s why ROA is a must-consider for your investment strategy:
Efficiency Check: reveals how well a company uses its assets to generate profits. A high metric indicates efficient management and potentially, better returns for you.
Industry Benchmarking: lets you compare companies within the same industry. This helps identify leaders in asset utilization.
