Return on Assets (ROA)

ROA measures how efficiently a company uses its assets, such as cash, inventory, equipment and buildings, to produce profit. It answers the question: for every unit of assets, how much profit does the business earn?

For example, a company with net income of 150,000 and total assets of 1.5 million has an ROA of 10%. Analysts often use average total assets over the year rather than the year-end figure, to account for changes during the period.

ROA varies widely by industry. Asset-light businesses, such as software or consulting firms, tend to have high ROA because they need few physical assets. Asset-heavy businesses, such as utilities, manufacturers and banks, tend to have lower ROA. For banks, an ROA of around 1% can be considered healthy, because they hold very large amounts of assets relative to their profits.

ROA is less affected by debt than return on equity, because it uses total assets regardless of how they are financed. However, because net income is after interest, more borrowing can still affect it. Some analysts adjust the numerator to add back after-tax interest for a cleaner comparison.