Return on Assets (ROA) Definition
Define ROA in Simple Terms
Expressed as a percentage, a higher ROA indicates a more efficient use of company resources.
It is calculated by dividing a company’s net income for a period by the value of the company’s total assets as follows:
ROA is most useful when comparing two companies within the same industry.
This is because the assets that are required to do business in different industries can be vastly different from one another, making it hard to appropriately compare, say, an airline and a law firm.
For example, say an investor wanted to compare two competing ice cream stores.
Company A has $5 million in net income and $20 million in assets.
Company B has $2 million in net income and $5 million in assets.
At first glance, Company A might seem like the better investment since it has a higher net income.
However, Company A’s ROA is only 25%, whereas Company B has an ROA of 40%.
This shows that Company B is able to use its assets more effectively to generate profit, and so is likely the better investment.
Return on Assets (ROA) Definition FAQs
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.