Investment Formula Description
Return on Assets ( ROA ) is an investment formula to measure profitability of a corporation to its total assets.
Similar to return on equity ( ROE ), return on assets ( ROA ) is used to measure management's efficiency to turn every dollar invested in assets to become net income for the company. Management that managed to earn more net profit for every dollar spent in assets is likely to be more efficient management. Hence, the higher the return on assets( ROA ) for a corporation, the better, as it indicates the management is efficient to turn assets into profit.
Like other investment formula, return on assets ( ROA ) is useful when it is compared with other competitors in the same industry. Different industries will have different level of dependencies on assets. Some companies like consulting firms do not need much assets to run its business. Since assets are consist of debts and equities, return on assets ( ROA ) gives investors an idea of effectiveness of a company to convert the invested capital into net income. Sometimes, return on assets ( ROA ) is also referred as return on investments ( ROI ).
Investment Formula Examples
Corporation CDE has $2,500,000 of total assets. For this financial year, its net income is $ 1,000,000. The return on assets ( ROA ) calculation is as following.
Return on assets ( ROA ) = Net profit / Total Assets = 1,000,000 / 2,500,000 = 0.4 or 40%
Corporation CDE managed to earn 40% of its total assets as its net income. The return on assets ( ROA ) for corporation CDE is 0.4 or 40%.
Another company, company XYZ is managed to earn $2,000,000 net profit for the same financial year with its $10,000,000 total assets. The return on assets ( ROA ) calculation for company XYZ is as following.
Return on assets ( ROA ) = Net profit / Total Assets = 2,000,000 / 10,000,000 = 0.2 or 20%
Even company XYZ can earn higher net profit compared with corporation CDE, but corporation CDE 's management is more efficient in term of utilizing their total assets as corporation CDE can earn 40% of its total assets as net profit while the return on assets ( ROA ) for company XYZ is only 0.2 or 20%.