What is Return on Assets?
Return on Asset, also referred to as ROA, is one of the fundamental financial ratios that is used by investors and other stakeholders to determine how profitable a company is for the total assets deployed. Users of this financial ratio include corporate management, analysts, investors, creditors, etc. who use the return on assets formula to determine how efficiently a company utilizes its assets to generate a profit. The ROA metric is also commonly expressed as a percentage by using the company’s two figures, namely net income and its average assets. The ROA metric gives investors and other stakeholders an idea of how effectively the company is able to convert the money it invests in the asset to net income. A higher ROA suggests that the company is more efficient and productive at managing its balance sheet to generate profits, whereas a lower ROA indicates that the company is not efficient at generating profit by deploying its assets and that there is room for improvement.
Geeky Takeaways:
- The return on assets metric indicates a company’s profitability in comparison to its total deployed assets.
- The return on assets is primarily used by management, analysts, investors, creditors, etc. to determine whether a company uses its assets efficiently to create profits.
- A company’s ROA can be calculated by dividing its net income by its total assets.
- A higher ROA denotes that the company is more efficient and productive at managing its assets to generate profits, and vice versa.
Table of Content
- Importance of Return on Assets
- Calculating Return on Assets (ROA)
- Examples of ROA
- What Return on Assets mean to Investors?
- Difference Between Return on Assets and Return on Equity
- Benefits of Return on Assets
- Limitations of Return on Assets
- Frequently Asked Questions (FAQs)