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ROA (Return on Asset) | Formula, Questions and Answers

ROA (Return on Asset)

ROA (Return on assets) refers to an economic concept used by economists and business leaders. It measures the ratio of a company’s bottom line to total assets. Thanks to the result obtained, financial analysts are able to estimate the rate of return on invested assets (and thus verify whether a company’s profitability is sufficient for its resources). If the return on assets can be practical to ensure the good financial health of a company, a few caveats must nevertheless be taken into consideration: it does not distinguish between the different assets of the company and takes little taking into account off-balance sheet commitments. The ROA nevertheless remains a valuable tool and an indicator of the good health of a company’s activity.

What is ROA?

Rate of return on invested assets
The ROA is used to check a company’s profitability.
The ROA makes it possible to verify the profitability of a company.

How to interpret it?

A good ROA depends on the company and industry, but 5% or higher is considered good.

So a high ROE and a low ROA can mean that the profit is generated from a high level of debt, while the profitability of the assets is insufficient. Some analysts believe that a company with a high ROA and ROE over a long period of time can be considered stable.

ROA formula

ROA = Net Income / Average Total Assets


ROA = Net Income / End of Period Assets

How to calculate the Return On Assets?

If you want to know where to look to define a company’s Return On Assets, this is where we indicate the process to follow:

Total Assets are all the assets of a business, that is, long-term assets and current assets.

Difference between ROCE and ROA

ROCE (Return on capital employed) is different from ROA. It expresses the profitability of a company’s invested capital after taxes. The invested capital includes the sum of fixed assets and the working capital requirement.

Benefits and limitations of ROA

A valuable tool, the ROA nonetheless has a few drawbacks:

However, the ROA is a valuable indicator. It is useful to put it in parallel with the ROE, another tool for calculating the yield taking into account the debt, unlike the ROA:

Questions and Answers

1. ABC Ltd. posts a net income of $10 million in current operations, and owns $50 million worth of assets as per the balance sheet, what is its return on assets?


$10 million divided by $50 million is 0.2, therefore the business’s ROA is 20%. For every dollar of assets the company invests in, it returns 20 cents in net profit per year.

2. Maria’s business

Net profit $ 4 500 000
Cost of debt $ 102 000
Tax rate 35%
Total assets $ 630 000


ROA = 4500000/630000 = 7.14 (that is 714%)

And now with the adjusted debt:

= (4500000+(102000*(1-35%)))/630000
= 4566300/630000
= 7.25 (that is 725%)

Let’s say that Maria can make a lot of money with few assets.

3. If a business records net profit, net profit is a key component not only in the income statement, but in all three basic financial statements. If it is obtained through the income statement, net profit is also used in both the balance sheet and the cash flow statement. of $ 10 million in current operations and owns assets valued at $ 50 million according to the Balance Sheet Balance Sheet The Balance Sheet is one of three fundamental financial statements. These statements are essential for both financial modeling and accounting. The balance sheet displays the total assets of the company and how those assets are funded, either through debt or equity. Assets = Liabilities + Equity, what is its return on assets?


$ 10 million divided by $ 50 million is 0.2, so the company’s ROA is 20%. For every dollar of assets the company invests in, it earns 20 cents in net profit per year.

4. A comparison of two businesses. Marie is launching a pastry shop with a classic decoration oriented to offer low and accessible prices. Elodie launches a pastry shop and offers high-end pastries. She does a conceptual interior decoration therefore oriented for medium and high-end customers. Which business is more profitable?


Marie’s Business Elodie’s Business
Net profit 650 000€ 1 620 000€
Total assets 1 500 000€ 5 400 000€
Return on Asset 650000/1500000 = 43% 1620000/5400000 = 30%

We can therefore see that Marie’s business generates less results than Elodie’s but that it is more efficient.

Sources: PinterPandai, Investopedia, Corporate Finance Institute, Business Insider

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