Key takeaways
A company's Return on Assets (ROA) is a financial ratio calculated by dividing a firm's net income by its averagetotal assets
ROA can be used to determine how efficiently a company utilizes its assets to generate profit
ROA should notbeused across industries since companies in one industry have different asset bases from those in another
Understanding Return on Assets (ROA)
The term Return on Assets (ROA) refers to a financial ratio that indicates how profitable a company is in relation to its total assets.
ROA is calculated by dividing a firm's net income by its average total assetsduring a period of time(usually in one year). It is generally presented as a percentage.
The formula is:
where,
(Average total assets are used in calculating ROA because a company's assets can vary over time due to the purchase or sale of vehicles, land, equipment, inventory changes, or seasonal sales fluctuations. )
Corporate management, analysts, and investors can use ROA to determine how effective it is for the company to convert resources into net profit.
The higher the ROA number, the better because the company can earn more money with a smaller investment. Put it simply, a higher ROA means more asset efficiency.
Investors can use ROA to find opportunities in the stock market. A ROA that rises over time indicates the company is doing well at generating its profits with its investment. On the other hand, if the company has over-invested in resources that have failed to produce revenue growth, its ROA may be falling.
ROA for public companies can vary substantially and are highly dependent on their industries, so the ROA for a tech company won't necessarily correspond to that of a food and beverage company.
This is why it is better to compare a company's ROA against its previous figures or a similar company's ROA.
Example of Return on Assets (ROA)
The chart below is the balance sheet from Apple's 10K statement showing the company's total assets at the end of the fiscal years ended September 26, 2020 and September 25, 2021.
Below is the income statement for the fiscal year 2021 (for the year ended September 25, 2021) for Apple according to its10K statement:
This means that for every dollar in assets during FY 2021, Apple generated 28.06 cents in profit.
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