Return on assets

Net income divided by average total assets: how much profit each dollar of assets produces.

DefinitionNet income divided by average total assets: how much profit each dollar of assets produces.

Return on assets (ROA) measures how efficiently a business turns everything it owns into profit, whoever financed it. It is most useful for comparing a company with itself over time or with peers in the same industry, because asset-heavy businesses such as manufacturers run lower ROA than service firms.

How it is computed

ROA = net income / average total assets, where the average is (opening + closing total assets) / 2. It also splits into net profit margin x asset turnover, which shows whether a change came from pricing and cost or from using assets harder.

Example

Net income of $180,000 with total assets of $1,400,000 at the start of the year and $1,600,000 at the end gives average assets of $1,500,000 and an ROA of 12%.

Where it goes wrong

Using closing assets instead of the average, mixing a quarter's income with a year's assets, and comparing across industries. The full guide is return on assets.

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