Return on Assets (ROA)

Return on assets (ROA) is a profitability ratio that helps determine how efficiently a company uses its assets. It is the ratio of net income after tax to total assets. In other words, ROA is an efficiency metric explaining how efficiently and effectively a company is using its assets to generate profits.


The formula for ROA is very simple which is expressed below:

Return on Assets = Profit after Taxes / Total Assets

The numerator is the profit considered after deducting the costs, depreciation and tax etc. One important thing to keep in mind while arriving at this figure is to consider the profits which are generated using such assets. Incomes generated from activities in which there is no contribution of these fixed assets should be excluded for this purpose. The denominator comprises of fixed as well as current assets. A more accurate version of ROA is when average total assets are considered i.e., the average of the opening assets at the start of the accounting period and closing assets at the end of the accounting period.

A different expression of ROA formula can be as follows and that gives better and deeper insight of this ratio.



Profit after Taxes


Total Revenue


Profit Margin * Asset Turnover

Total Revenue

Total Assets

From this expression, a company can make out what is driving its ROA. Is it because of higher profit margins or due to higher asset turnover? Say, a 20% ROA can be a result of 10% margin * 2 times asset turnover or 5% margin * 4 times asset turnover.


Below is a sample of financial figures for ABC Co.
All figures in USD. The accounting period under consideration is Financial Year 2011-12.

Net Profit after tax






Non-current Assets



Tangible Assets



Intangible Assets



Current Assets









Accounts Receivables



Total Assets



Return on Assets


Profit after Tax / Total Assets







From the above illustration, ROA is 0.2 or 20%. From this, one can conclude that for every dollar invested in the assets of ABC Co, it results in a profit worth 20 cents. In other words, to create 1 unit of profit, 5 units need to be invested in the assets of the company.


Return on assets is a measure of how effectively a company uses its assets. Higher is this figure, better is the utilization of the company’s assets. For e.g., a company may earn profits worth 1 million with an investment of 10 million giving ROA of 10%. On the other hand, another company can give same profit with an investment of just 5 million, giving a ROA of 20%. The second company certainly is utilizing its resources better because although both are generating same profits, the second company is doing it with half the investment. It’s easier to generate profits if you pump in the huge amount of money. But one needs to consider the cost of capital and the opportunity cost as well with every investment being made.
Thus, investors can use ROA figure to analyze which company has efficient utilization and thus make an informed choice before investing in a company. One can even compare ROA for a company over a period of 5-10 years. An increasing ROA suggests profitability of the company is increasing. On the other hand, a decreasing ROA can be an indication that company’s performance is deteriorating.


Lower Asset Productivity

Lower productivity of the assets is the key reason for lower ROAs. This can be cured by proper repair and maintenance or replacement of old assets. The techniques of capital budgeting may help solve such dilemmas.


Too much of wastages could also be inferred as a reason for lower ROA. Reducing wastages is a major challenge in most of the manufacturing companies. Wastages not only means the product or raw material wastage, the wider meaning of wastage includes idle labor hours, etc. Proper production planning and the process of testing the products at every stage can significantly reduce the wastages.
Other reasons could be the higher cost of machinery, higher interest rates etc.


Return on assets of different companies can be compared only to companies within the same sector. Comparing ROAs of companies belonging to different sectors can be misleading. This is because some sectors require huge initial investment and have long gestation periods. For such companies, ROA will be relatively low. E.g., companies belonging to infra and airlines sector.

Last updated on : September 14th, 2017
What’s your view on this? Share it in comments below.

Leave a Reply

Return on Equity (ROE)
  • How to Analyze (Interpret) and Improve Quick Ratio?
    How to Analyze (Interpret) and Improve Quick …
  • Fixed Charge Coverage Ratio
    Fixed Charge Coverage Ratio
  • DuPont Analysis
    DuPont Analysis
  • Debtors/ Receivable Turnover Ratio and CollectionPeriod
    Debtors / Receivable Turnover Ratio and Collection …
  • Subscribe to Blog via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Join 122 other subscribers

    Recent Posts

    Find us on Facebook

    Related pages

    types of financial ratios and their formulasconstant growth rate calculatorprofit maximization goaldirect financing lease exampleaccounting debit vs creditcash accounting vs accrualsoftware capitalization rules gaapirrevocable standby letter of credit definitionmeaning of direct and indirect expensesadvantages and disadvantages of activity based budgetingdividend valuation model definitiontotal assets turnover ratio meaninginvestment appraisal npvmeaning of bonds and debentureshigh asset turnover ratiocapital of gdrflexible budget advantages and disadvantagesdeferred lcowners equity equationratio of fixed assets to long term liabilitiescalculation of creditor daysformula for epsgross profit margin ratio formulalong term bank loan advantages and disadvantagesdefinition of invoice discountingadvantages of convertible bondstimes interest earned ratio definitioncoupons bondsmeaning of assestdefinition of preferred sharesmeaning of bonus issuebanking covenantshigher purchase meaningexplain the concept of budgetingconvertible debentures indiaconcept of marginal costingwacc weighted average cost of capitalwhat is fictitious assetaccount payable and note payablemethod of evaluating capital investment proposalsdefine discountingdouble entry bookkeeping meaningprimary goal of managerial accountingsignificance of ratio analysisnegative covenants loan agreementbenefit cost ratio calculatordisadvantage of irrbenefit cost ratio advantages and disadvantagesmeaning of debit in hindidisadvantages of buying shareswhat is roce ratiodscr loanliquidity ratios explainedwhat are examples of current liabilitieshow do you calculate average inventorymarginal costing advantages and disadvantagesdisadvantages of profitability indextransferable lcpvifa tablesloan turnover ratiosundry definition accountingtypes of conglomerate mergersdividend payout ratio calculationtraceable fixed costsinventory to cost of goods sold ratioaffirmative covenantlc at sight payment termshypothecatehow to calculate operating capitalwhats a fixed costdiscount cash flow formulabank overdraft advantagesmodigliani miller approach of capital structurearbitrage portfolio theoryredemption of debentures by sinking fund method