What is Return on Assets?

As the name suggests, this measurement is all about the return the company got over its assets. It is basically for measuring how good the company does with the assets it has got. This can also be interpreted as how many dollars of earning the company derives from each dollar of assets the company posses. This measurement comes in handy when comparing business organizations in the same industry.

Usually this ratio varies across the industries as they have their own limitations. The businesses with low margins such as consumer products will carry a lower ratio while businesses such as software will record higher ratio. The businesses that need a high capital investment also will have a lower ROA ratio. This ratio is calculated as below:

ROA = Net Income / Total Assets

If you are an investor, ROA gives you an idea of how profitable a company is compared with the companies of the same industry. When calculating the value of total assets, the valuation is done using the carrying value of the assets. Sometimes, the carrying value of assets does not tally with the market value and may produce a defective return on asset ratio. Investors need be careful in a condition like this.

Return on assets is commonly used for comparing the performance of financial institutions because majority of their assets will have carrying value close to the market value.

Return on assets ratio cannot be used for comparing companies across industries as mentioned above. If cross industry comparison is required, then there are other ratios to consider. If you are looking at investing, you should look for the best return on assets among the similar companies and settle on the winner!