Return on Assets ROA: Formula and ‘Good’ ROA Defined

However, any one company’s ROA must be considered in the context of its competitors in the same industry and sector. In other words, every dollar that Charlie invested in assets during the year produced $13.3 of net income. Depending on the economy, this can be a healthy return rate no matter what the investment is. Since all assets are either funded by equity or debt, some investors try to disregard the costs of acquiring the assets in the return calculation by adding back interest expense in the formula. As a general rule, a return on assets under 5% is considered an asset-intensive business, while a return on assets above 20% is considered an asset-light business.

Finally, the ROA ratio can be used to compare a company’s profitability to its industry average. A company with a higher ROA ratio is more profitable than the average company in its industry. Also worth to mention that usually Net Income used in Return on Assets ratio calculation does not cover interest costs, i.e. Net Income before Interest Expenses (taking into account taxation) should be taken. The reason for this is that assets are being financed either by equity or debt, therefore it is essential to eliminate cost of borrowing in order to get proper result.

Define ROA Ratio in Simple Terms

The key distinction between these two metrics, however, is how they treat a company's debt and leverage. When looking at financial ratios, it is important to compare them across companies. It is also important to compare the ratios to companies within the same industry. Although the ROA for this company may appear to be very high compared to its peers, the company could actually be inefficient in generating income through its assets. An ROA of 5% or better is typically considered good, while 20% or better is considered great. In general, the higher the ROA, the more efficient the company is at generating profits.

• Below is the balance sheet from Exxon's 10K statement showing the 2021 and 2020 total assets.
• Return on Assets is calculated by divided a company's net income by its total assets.
• It can be used to assess an individual company's performance over time or to evaluate it relative to similar companies in the same industry.
• Thus, as a company takes on more debt, its ROE would be higher than its ROA.

Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk. Another way that investors can use the return on assets ratio is to compare the ratio of different companies within the same industry. This can help the investor to see which companies are performing better than others and make investment decisions accordingly. Another way to calculate ROA is to take the operating income of a company and divide it by the total assets of the company. This gives a more accurate picture of profitability since it excludes one-time items like gains or losses from investments. There are a few different ways to calculate a company’s return on assets (ROA).

"The ROA is one indicator that expresses a company's ability to generate money from its assets," Katzen says. "Generally speaking, the higher the ROA, the more effective a company is at generating income for investors. The more income a company generates, the more likely the investment will appreciate." It shows how much profit is being generated relative to all of its assets.

Examples of using Return on Assets (ROA) in oil and gas sector

Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10000. Say Company XYZ has a net income of $10 million and total assets of $50 million. No matter which method is used, calculating ROA can give valuable insights into a company’s profitability and how well it is using its assets. Investment Plans (“Plans”) shown in our marketplace are for informational purposes only and are meant as helpful starting points as you discover, research and create a Plan that meets your specific investing needs.

Return on Assets (ROA): Definition, Formula, & More

A "good" ROA depends on the company, the time frame of the calculation, and a few other factors. "Better than your competition is what I'd aim for. Generally, you would compare competitive companies or industries." Return on assets, or unreimbursed employee expenses what can be deducted ROA, is a metric used to evaluate how efficiently a company is able to generate profit with the assets it has available. Both ROA and profit margin can be used to show how efficient a company is in terms of its assets and expenses.

Return on assets formula

It assesses how efficiently a company generates profits in relation to the total resources under its control. In essence, it considers the return on all assets, regardless of whether they are financed with equity or borrowed funds. The return on assets (ROA) reflects the overall effectiveness of resource utilization and capital structure. ROE is calculated by dividing a company’s net profits over a given period by shareholders’ equity—it measures how effectively the company is leveraging the capital it has generated by selling shares of stock. If ROA examines how well a company is managing the assets it owns to generate profits, ROE examines how well the company is managing the money invested by its shareholders to generate profits. The return on assets ratio measures how effectively a company can earn a return on its investment in assets.

What is a Good Return on Assets Ratio?

However, ROAs should always be compared amongst firms in the same sector. For instance, a software maker has far fewer assets on the balance sheet than a car maker. As a result, the software company's assets will be understated and its ROA may get a questionable boost. ROA is calculated by dividing a firm's net income by the average of its total assets. In other words, the impact of taking more debt is negated by adding back the cost of borrowing to the net income and using the average assets in a given period as the denominator.

ROA vs Profit Margin Ratio

Running a successful business depends on how efficiently it uses its assets while keeping resources low to grow and profit over time. Since a company’s profit margins are a vital part of success, evaluating return on assets can be beneficial for making sure the company is staying on track and not wasting money and resources. Charlie’s Construction Company is a growing construction business that has a few contracts to build storefronts in downtown Chicago.

Banking services and bank accounts are offered by Jiko Bank, a division of Mid-Central National Bank. JSI and Jiko Bank are not affiliated with Public Holdings, Inc. (“Public”) or any of its subsidiaries. As you know, ROA is an abbreviation of return on assets, while ROE stands for return on equity. Both can be used to evaluate a company’s financial performance but in different ways.