Return on Assets (ROA)

What it is:

Return on assets measures the amount of profit the company generates as a percentage of the value of its total assets.

How it works/Example:

A company's return on assets (ROA) is calculated as the ratio of its net income in a given period to the total value of its assets. For instance, if a company has $10,000 in total assets and generates $2,000 in net income, its ROA would be $2,000 / $10,000 = 0.2 or 20%.

Why it Matters:

The profit percentage of assets varies by industry, but in general, the higher the ROA the better. For this reason it is often more effective to compare a company's ROA to that of other companies in the same industry or against its own ROA figures from previous periods. Falling ROA is almost always a problem, but investors and analysts should bear in mind that the ROA does not account for outstanding liabilities and may indicate a higher profit level than actually derived.
