Return on Assets ROA Formula, Calculation, and Examples

“Alternative assets,” as the term is used at Public, are equity securities that have been issued pursuant to Regulation A of the Securities Act of 1933 (as amended) (“Regulation A”). These investments are speculative, involve substantial risks (including illiquidity and loss of principal), and are not FDIC or SIPC insured. Alternative Assets purchased on the Public platform are not held in a Public Investing brokerage account and are self-custodied by the purchaser. The issuers of these securities may be an affiliate of Public Investing, and Public Investing (or an affiliate) may earn fees when you purchase or sell Alternative Assets.

She enjoys writing in these fields to educate and share her wealth of knowledge and experience. But besides comparisons to industry competitors, another use case of tracking ROA is for tracking changes in performance year-over-year. Generally, all companies should strive to maximize the output level with the required spending kept at a minimum – as this means the company is operating near full capacity and efficiency.

What Are the Disadvantages of ROA as a Measure for Performance?

This is necessary since we need to compare Net Profit for the period with the assets value, where we use average value to have an indicative level over the whole period. Return on assets of a company is defined to be the net income of the company (over the last 12 months) divided by the company’s total assets (averaged over the last 12 months). The return on assets formula is one useful way to measure a company’s success, and, in general, the higher the ROA, the better.

• Using the Exxon Mobil Corporation (XOM) as an example, below is an excerpt of Exxon’s income statement and balance sheet from its 10K statement (pages 72 & 74) for 2020 and 2021.
• One of management's most important jobs is to make wise choices in allocating its resources, and it appears Macy’s management, in the reported period, was more adept than its two peers.
• And finally, the return on assets formula should be applied by dividing the total net income by the value of the total assets to get the return on assets ratio.
• However, a higher ROA than average may not always be a good sign of efficiency.
• The feasibility of the company’s existence can be determined by comparing the company’s profit to the resources used to earn these profits and revenue.

Market data is provided solely for informational and/or educational purposes only. It is not intended as a recommendation and does not represent a solicitation or an offer to buy or sell any particular security. It’s important to use this ratio to compare companies within the same industry, and/or to track a single firm’s profit trend over a period of time.

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 for the company.

How to Calculate Return on Assets (ROA) With Examples

ROA can be used to evaluate companies in the same industry and assist in getting a picture of how efficient they are at making money. A higher ROA can mean a company is doing well at managing earning profits from their assets and can offer a glimpse into possible investment opportunities. One of the disadvantages of ROA is that you can only use it when comparing companies in the same industry or sector due to their varying asset bases. In addition, the asset base isn’t a projection of a company’s future, as it can change depending on market conditions and the buying and selling of assets.

As a general rule, the price of a T-bills moves inversely to changes in interest rates. Although T-bills are considered safer than many other financial instruments, you could lose all or a part of your investment. Many companies depend on industry-specific resources to run efficiently.

The return on assets shows how efficient a company is in converting its invested money into net income. But for non-financial companies, this is not the case as debt and equity capital are strictly segregated, as are the returns to each. The interest expense is the return for debt providers and the net income is the return for equity investors. Therefore, the basic ROA formula mixes things up by comparing returns to equity investors (net income) with assets funded by both debt and equity investors (total assets).

ROA vs Profit Margin Ratio

A rising ROA may indicate a company is generating more profit versus total assets. Companies with rising ROAs tend to increase their profits, while those with declining ROAs might be struggling financially due to poor investment decisions. A ROA of over 5% is generally considered a good return on assets for a company. Nevertheless, whether a company’s ROA is a good return on assets or not would depend on the average ratio in the industry. This means that to get a reliable result, it is better to always compare ROAs amongst companies in the same sector. Calculate and compare the return on assets ratio of the three companies given in the table below.

While this formula is the most popular, it's not the only one used to determine a company's ROA. Katzen says for non-financial companies, it can be helpful to add back interest expenses because of the inconsistency that can come from debt and equity capital being segregated. ROA (return on assets) is a company's net profit in relation to its assets value.

Return on assets

See our Investment Plans Terms and Conditions and Sponsored Content and Conflicts of Interest Disclosure. According to the return on assets formula, fixed asset turnover ratio formula example calculation explanation Mary runs a more efficient business. The return on assets ratio is a way to tell how much profit a company can generate from its assets.

ROA vs ROI

ROA is important, but ROA does have its limitations, such as not including the use of debt. At first glance, Company A might seem like the better investment since it has a higher net income. Under the same time horizon, the “Total Assets” balance decreases from $270m to $262m. Sam spends $1,500 on a bare-bones metal cart, while Milan spends $15,000 on a zombie apocalypse-themed unit, complete with costume.

Evaluating Startups for Venture Capital

It is important to note that the return on assets ratio only tells how much profit a company is making from its assets. It does not take into account other factors such as the company’s liabilities or shareholders’ equity. However, it is still a useful metric for assessing a company’s overall profitability. For investors, the return on assets ratio is relevant because it provides insight into a company’s overall efficiency and profitability. A high return on assets ratio indicates that a company can generate strong profits from its assets.