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Return on Assets (ROA)
A profitability ratio showing how efficiently a company uses its assets to generate earnings.
Formula
ROA = Net Income / Average Total Assets × 100
Average Total Assets = (Beginning Assets + Ending Assets) / 2
Definition
What is Return on Assets?
ROA measures how effectively a company converts its assets into profit. It answers: for every dollar of assets, how much profit does the business generate?
ROA Interpretation
Higher ROA indicates more efficient asset utilization. Asset-light businesses (like SaaS) typically show higher ROA than capital-intensive businesses (manufacturing).
ROA Limitations
ROA can be misleading when comparing companies with different asset structures or accounting methods for depreciation. Use it alongside other profitability metrics.
Example
Company financials:
- Net Income: $150,000
- Beginning Assets: $800,000
- Ending Assets: $1,000,000
Average Assets = ($800K + $1M) / 2 = $900,000
ROA = $150K / $900K = 16.7%
Every dollar of assets generates $0.167 in profit.
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