Return on Assets (ROA)

Profitability Metric Investment Wiki — Fundamentals
Return on Assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA gives a manager, investor, or analyst an idea as to how efficient a company's management is at using its absolute capital base (both debt and equity) to generate earnings.
Quick Reference
Type Profitability Metric
Formula Net Income ÷ Average Total Assets
Target > 5% (Industry dependent)
Best Used For Comparing capital efficiency between peers

1.0 The Formula

Basic Form

formulaROA = Net Income / Total Assets

Because assets can change significantly over a year (like when a company buys another firm), the most accurate calculation uses the Average Total Assets calculated as (Beginning Assets + Ending Assets) / 2.

Worked Example

Company Net Income Total Assets ROA
Company X $50M $500M 10.0%
Company Y $50M $2,000M 2.5%

Both companies generate the exact same profit, but Company Y required four times as many factories and inventory (assets) to pull it off. Company X is mathematically superior in allocating capital.

Highly leveraged companies can have decent ROE (Return on Equity) but terrible ROA, because they use heavy amounts of debt to buy assets. ROA strips out the leverage illusion.

2.0 Interpretation & Edge Cases

ROA benchmarks are severely polarized by industry:

  • Software & Tech (15%+): These companies require almost zero hard physical assets (just servers and laptops), causing ROA to look exceptionally high.
  • Utilities & Railroads (3% - 5%): These industries require massive capital expenditures (laying track, building power plants), guaranteeing naturally low ROA. You must only compare ROA between direct competitors.

3.0 Related Pages

Return on Equity (ROE)

Differs from ROA strictly in the denominator: ROE measures profit vs. Equity, while ROA measures profit vs. Total Assets (Equity + Debt).

Debt-to-Equity Ratio

If a company has high ROE but low ROA, it has a dangerously high Debt-to-Equity ratio.