Return on Asset (ROA)

Return on Equity shows how efficiently a company utilizes profits from its assets.  A high ROA indicates a company is financially solid.  The ROA reveals:

  • How much profit a company generates with the money shareholders have invested
  • The amount of net income returned as a percentage of shareholders equity.
  • A firm’s efficiency at generating profits and using investment funds to generate earnings growth.
  • A ROA of five percent is considered good.

ROA = (Net Income/Average Total Assets)

 

  • Net income is derived from the income statement of the company and is the profit after taxes.
  • Total assets are read from the balance sheet and include cash and cash-equivalent items such as receivables, inventories, land, capital equipment as depreciated, and the value of intellectual property such as patents.
  • Average Total Assets =  (beginning of the assets + end of year assets)/2
  • A ROA of 20% means that the company produces $1 of profit for every $5 it has invested in its assets
  • An increasing ROA indicates a business is continuing to earn an increasing profit on each dollar of investment.
  • A falling ROA indicates trouble in a company.

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