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Return on assets (ROA)

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What is return on assets (ROA)?

Return on assets (ROA) is a financial ratio that measures how efficiently a company uses its total assets to generate net profit. It shows the percentage of profit a company earns for every unit of assets it owns, providing insight into management’s effectiveness at deploying resources for maximum profitability.

Key takeaways

1
Asset efficiency indicator

ROA reveals how well a company’s assets are being used to produce earnings, making it a core measure of operational performance.

2
Simple calculation
  • ROA = Net Income / Total Assets
  • Sometimes, average total assets are used for greater accuracy if asset values fluctuate during the period.

3
Expressed as a percentage

A higher ROA means the company is more efficient at converting assets into profits, while a lower ROA suggests room for improvement.

4
Best for industry comparison

ROA is most useful when comparing companies within the same industry, as asset requirements can vary widely between sectors.

Why ROA matters?

Return on Assets (ROA) provides valuable insight into how efficiently a company generates profit from its asset base, helping investors, analysts, and management make informed investment and operational decisions. A high ROA signals effective use of resources, while a low ROA may indicate the need to improve asset utilization or cost control. Investors frequently compare ROA among similar companies to identify those that are maximizing the value of their assets.

The ROA calculation process

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1
Find net income

Net income is reported at the bottom of the income statement.

2
Find total assets

Use the balance sheet to get total (or average) assets for the period.

3
Apply the formula
  • ROA = Net Income / Total Assets
  • Convert the result to a percentage by multiplying by 100.

4
Interpret the result

Higher percentages indicate better asset efficiency.

Impact on business and financial decisions

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Operational efficiency: Highlights how well assets are used to generate profits

Strategic planning: Informs asset purchases, disposals, and investment choices

Benchmarking: Enables comparison with peers and industry standards

Investor appeal: Attracts investors seeking companies with strong asset returns

Impact on financial statements

Real-world examples

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Case study: Retail sector ROA comparison

  • Macy’s: Net income $582 million, total assets $16.4 billion → ROA = 3.5%
  • Kohl’s: Net income $109 million, total assets $13.6 billion → ROA = 0.8%
  • Dillard’s: Net income $593 million, total assets $3.5 billion → ROA = 16.8%

Dillard’s demonstrates superior asset efficiency, generating nearly 17 cents of profit for every dollar invested in assets, compared to Macy’s and Kohl’s.

Frequently asked questions about ROA?

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A “good” ROA depends on the industry. Capital-intensive sectors typically have lower ROA than service-based ones. Compare ROA to industry peers for context.
Yes. A negative ROA means the company is losing money on its assets.
ROA measures profit relative to total assets, while return on equity (ROE) measures profit relative to shareholders’ equity. ROA factors in the impact of debt, ROE does not.