Get a clear understanding of the Return on Assets (ROA) ratio: calculation, significance, and how it measures a company's profitability.
Return on Assets (ROA) is a financial ratio that measures a company's ability to generate profit from its assets. It expresses the profit earned in relation to the total assets of a company.
The formula for the Return on Assets is:
Return on Assets (ROA) = Net Income / Total Assets
Where Net Income is a company's profit after accounting for all expenses and Total Assets is the sum of all the assets a company owns.
A general rule of thumb for Return on Assets is that a higher ROA is better, as it indicates that a company is generating more profit from its assets. A ROA of around 5% or higher is considered good for most companies, although the acceptable range can vary depending on the industry and the company's financial history. A low ROA may indicate that a company is not effectively using its assets to generate profit or may have too much debt relative to its assets.