The Return on Assets ROA Formula Explained

In 2024, it had total liabilities that exceeded $422 billion—more than 16 times its total shareholders’ equity of $25.268 billion. In order to calculate the return on assets, the company is required to ascertain two major elements of finance, net profits and average assets/total assets. Return on assets (ROA) is a financial ratio business owners and investors use to understand how much profit a business generates using its assets. The calculation of ROA does not reveal important business performance aspects, including market competitiveness, future growth potential, and operational efficiency beyond asset usage rates. Other than asset efficiency areas, analysts and investors scrutinise companies through multiple financial indicators during their assessment processes.

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After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career. If a company’s ROA is considerably higher relative to its industry, it may indicate that it is not investing enough into the company to take advantage of growth opportunities. In Feb. 2025, food industry giant McDonald’s posted an ROA of 14.68, while tech company NVIDIA posted an ROA of 77.99. Many professional investors consider an ROE of 15%-20% acceptable, but ROE comparison depends on the sector or industry.

A large difference between the two suggests your company is using significant debt to amplify returns. “ROA simply shows how effective your company is at using those assets to generate profit,” says Joe Knight, author and co-owner of the Business Literacy Institute, in the Harvard Business Review. When looking to assess your business’ financial performance, one of the most important metrics to keep in mind is EBIT (Earnings Before Interest… For instance, a company may prefer to use its own funds for asset investment to avoid diluting the ROA with increased liabilities from external borrowings.

• The asset bases of companies within the oil and gas industry aren’t the same as those in the retail industry.
• ROA varies across industries due to differences in business models and asset requirements.
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• The ROA metric gives investors and other stakeholders an idea of how effectively the company is able to convert the money it invests in the asset to net income.
• If your ROA increased or stayed the same, then you know that your business was efficient at turning those new assets into profit.

If a kid’s lemonade stand generates $1,000 in profit in one day, for example, that’s likely a more impressive use of resources than a cafe generating $1,000. Emily Guy Birken is a former educator, lifelong money nerd, and a Plutus Award-winning freelance writer who specializes in the scientific research behind irrational money behaviors. Her background in education allows her to make complex financial topics relatable and easily understood by the layperson. She is the author of four books, including End Financial Stress Now and The Five Years Before You Retire. However, if you compared the manufacturing company to its closest competitors, and they all had ROAs below 4%, you might find that it’s doing far better than its peers. Conversely, if you looked at the dating app in comparison to similar tech firms, you could discover that most of them have ROAs closer to 20%, meaning it’s actually underperforming more similar companies.

Why Do Companies Use ROA?

ROA is a key profitability measure that provides insights into a company’s financial health. The total assets on a company’s balance sheet consist of both current assets and long-term assets. Current assets, which are more liquid, can include cash and cash equivalents, accounts receivable, and inventory. Long-term assets will include fixed, tangible assets such as buildings and equipment, and, in some cases, intangible assets such as intellectual property.

What is Return on Assets (ROA)?

Output from Alpha should not be construed as investment research or recommendations, and should not serve as the basis for any investment decision. All Alpha output is provided “as is.” Public makes no representations or warranties with respect to the accuracy, completeness, quality, timeliness, or any other characteristic of such output. Please independently evaluate and verify the accuracy of any such output for your own use case. Although there are never guarantees when it comes to investing, ROA can be a beneficial tool for evaluating company performance. Non-current assets may not be convertible into assets within a year, if at all. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching.

Return on Assets (ROA): Formula, Calculation & Industry Examples

A higher ROA might indicate a more lucrative investment opportunity, showcasing a better potential for returns on investment. ROA is typically expressed as a percentage, making it easier to compare across companies. As mentioned, before making any judgments about whether a particular ROA is good or bad, it’s important to compare companies of similar size and in the same industry. She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies. All programs require the completion of a brief online enrollment form before payment.

Step 2: Determine Total Assets

Usually a negative ROA is a bad sign, as it means the company is losing money. While a higher ROA often indicates efficiency, it’s crucial to consider industry norms and other financial metrics for a comprehensive assessment. A company with high debt might have a strong ROA but still face financial risks.

Comparing ROA between a bank and a retail company is not meaningful due to differences in asset structures. A good ROA depends on industry standards, company performance, and economic conditions. At first glance, the car maker’s ROA might appear low as opposed to the software company’s. However, if the automobile industry’s average ROA is 2%, then the auto company’s 4% ROA is outperforming its competitors, signifying that it is making effective use of its resources.

• Organisations with higher capital investment in assets must dedicate more resources to acquiring and maintaining these assets, which reduces the profitability percentage.
• Emily Guy Birken is a former educator, lifelong money nerd, and a Plutus Award-winning freelance writer who specializes in the scientific research behind irrational money behaviors.
• A more sophisticated ROA calculation takes into account that the value of a company’s assets changes over time.
• The above content provided and paid for by Public and is for general informational purposes only.
• Thousands of people have transformed the way they plan their business through our ground-breaking financial forecasting software.
• A negative ROA could be a sign of operational or financial difficulties that require further investigation.

ROA factors in how leveraged a company is or how much debt it carries. Its total assets include any capital it borrows to run its operations. Return on assets (ROA) is a financial ratio that calculates the profitability of a business in relation to its total assets. This ratio is often used to assess how effectively a company is using its assets to generate profit. Ed’s balance sheet should reveal why the company’s return on equity and return on assets were so different. The carpet maker carried an enormous amount of debt, which kept its assets high while reducing the proportional amount of shareholders’ equity.

A higher ROA typically indicates better asset utilization and more efficient management practices. This, in turn, could translate to potentially higher returns for investors. This ROA percentage indicates that ABC Inc. effectively generates profits relative to its total asset base, showcasing efficient asset utilization and potentially attractive returns for investors. While ROA and ROE are useful measurements, they should be used alongside other metrics, including net profit margin and the DuPont formula, to gain a comprehensive view of financial health. ROAs should always be compared among firms in the same sector, however.

Return on assets is one of them and we’ve got everything you need to start using it to understand your financial health today. ROA can be misleading if companies from different industries are compared. For instance, comparing the ROA of a tech firm against that of a manufacturing firm would not produce a fair picture of efficiency because their asset structures and capital requirements differ. Not every company follows the same accounting practices, and even slight differences can affect ROA significantly. For example, a company might account for the purchase of a new asset right away, all at once, vs. amortizing the cost over several years.

Today we take a look at the risks and rewards of starting a business. The frequency can vary depending on the needs of the analysts or investors but is commonly calculated on a quarterly or annual basis. Typically, an ROA greater than 5% is considered good, but this is just a general rule of thumb.

This could be achieved by boosting sales, reducing costs, or optimizing asset utilization. Companies may also opt to sell off underperforming assets to improve ROA. The company could be investing heavily in manufacturing equipment and premises, while still working to expand its sales. The initially low ROA might rise as the manufacturer’s products become more popular, demonstrating a return on the original investment in assets. ROA is very useful for comparing companies to their industry peers or to sector benchmarks.

As you know, ROA is an abbreviation of return on assets, while ROE stands for return on equity. Both can be used to evaluate a company’s financial performance but in different ways. The ROA equation is used to determine how effectively a company utilizes its assets in producing profits, which assists investors in analyzing a business’s what does roa stand for finances. It only makes sense that a higher ratio is more favorable to investors because it shows that the company is more effectively managing its assets to produce greater amounts of net income. A positive ROA ratio usually indicates an upward profit trend as well. ROA is most useful for comparing companies in the same industry as different industries use assets differently.