Description
Return On Assets (ROA) measures the profitability of a corporation as compared to its assets. That is, it is a measure of how efficiently management is able to use the existing asset base to generate profits.
For example, if two companies manufacture parts for cars and have similar types of assets (assume company A has $ 10 million in assets and company B has $30 million in assets) but company A earns $2 million in a year while company B earns $3 million. Company A operates more efficiently because it generates a higher percentage of earnings relative to its asset base ( $2 million / $10 million = %20 vs. $3 million / $30 million = 10%).
Calculation
Return On Assets (ROA) = Net Income / Total Assets
Note: Some calculate the numerator as Net Income + After Tax Interest Expense
What it Means
ROA is a measure of profitability. In a nutshell, it measures how efficiently the management team uses its assets to generate earnings.