Return on Assets (ROA)
Return on Assets (ROA)
Return on Assets (ROA) is a financial metric that indicates the efficiency of a company in using its Assets to generate earnings. It is calculated by dividing Net Income by total Assets. ROA is expressed as a percentage, reflecting how well a company converts its investment in Assets into profit.
Formula: ROA = (Net Income / Total Assets) x 100
Examples:
If a company has a Net Income of $100,000 and total Assets of $1,000,000, its ROA would be:
ROA = ($100,000 / $1,000,000) x 100 = 10%
In this case, the company generates a profit of 10 cents for every dollar of Assets it owns.
Case Study:
Company A has an ROA of 15%, indicating strong Asset utilization compared to its industry average of 8%. This suggests that Company A is more efficient in generating profit from its Assets than its peers. Conversely, Company B has an ROA of 5%, signaling potential inefficiencies in Asset-management/">Asset Management.