Return on Assets

Return on Assets (ROA) is a financial ratio that measures a company's efficiency in generating profits from its assets. A higher ROA indicates that a company is generating more profit per dollar of assets, while a lower ROA indicates the opposite.

Return on Asset serves as a strong indication of a company's profitability and because it takes into consideration the debts owed, it does not have the limitations of ROE.

Therefore if a company should have a huge debt, it will have a high ROE but the ROA will be low. Despite this distinction between the two metrices, either one is not superior to the other and hence it is not advisable to solely depend on one metric when making investment decisions.

Calculation

ROA is expressed as a percentage of the Net income and the total assets of a company.

That is ROA = [Net Income]/[Total asset] x 100

Importance

ROA measures a companies profitability. This can be between two periods (to see when the company was more profitable) or between two companies (to see which of the two is more profitable).

Limitations

ROA varies for every industry and this makes it difficult to compare the ROA of two companies in different industries. The reason for this is because every industry has its peculiar asset base.

So a company in tech will have a different asset base to that in agriculture or finance. Therefore ROA as a metric is only effective when comparing between two companies within the same industry. Even then. the scale of each company's asset must be taken into consideration.

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