What is Return on Assets?
ROA (Return on Assets) is a company's net profit in relation to its total assets value. This way, we can rate the profitability of assets. This indicator informs us how profitable the company is in generating profit from its assets.
It is very important, for example, when a company wants to take a loan. In such a case, the bank will surely want to look into ROA data because it shows how effectively the company will spend the borrowed money. Internally, ROA is used to evaluate whether it is necessary to change the company's strategy in the area of sales and managing assets.
How to Calculate Return on Assets?
As you already know that ROA is the relationship between net profit and total assets value, the derivation of the formula is very simple. You need two variables: net profit and total assets. Divide the first one by the second, then multiply the result by 100% — because ROA is always expressed as a percentage.
ROA = (Net Profit / Total Assets) × 100%
Example A
- Net profit: $10,580
- Total assets: $8,800
- ROA = (10,580 / 8,800) × 100% = 120%
Example B
- Net profit: $32,550
- Total assets: $3,100
- ROA = (32,550 / 3,100) × 100% = 1,050%
You can input those values in our Return on Assets calculator above. Note that both examples represent totally different situations — use the ROA benchmarks to evaluate which is truly better for the company.
What is a Good Return on Assets?
ROA, similarly to ROE, should be as high as possible. The rule is simple: the higher the ROA, the better the financial condition of your company.
It is excellent when it reaches several dozen percent, but it is very hard to get to this level and retain such a value for an extended time period. Therefore, we can talk about a good return on assets when it is about 10–15%. It is also very important to look back into the history of a company's ROA, as even a very good value does not have to mean long-term profitability.
| ROA Range | Assessment |
|---|---|
| < 0% | Negative — company operating at a loss |
| 0% – 2% | Very Low — poor asset utilization |
| 2% – 5% | Low — below average, needs improvement |
| 5% – 10% | Average — acceptable industry performance |
| 10% – 15% | Good — solid and sustainable performance |
| > 15% | Excellent — outstanding asset productivity |
What Are Other Great Financial Ratios?
Another two financial ratios that are excellent for analyzing returns are the Return on Equity (ROE) and the Return on Invested Capital (ROIC). Besides, it is key to know how much free cash is remaining for paying debt's principal, dividends, and stockholders. You can find it out with the levered free cash flow and the unlevered free cash flow metrics.
Make sure to also check out the time value of money concepts, since cost of opportunity is one of the core topics in investing.