Return on Assets, so-called “ROA” is a financial metric that measures how effectively a company is using its assets to generate profit.
ROA is calculated by dividing a company's net income by its total assets. The resulting percentage indicates how much profit a company is generating per dollar of assets it owns.
A higher ROA indicates that a company is using its assets efficiently to generate profits, while a lower ROA suggests that the company may not be utilizing its assets as effectively.
ROA is often used by investors and analysts to assess a company's profitability and efficiency.
Company XYZ has a net income of $100,000 and total assets of $1,000,000. To calculate their ROA, we would divide their net income by their total assets:
ROA = Net Income / Total Assets
ROA = $100,000 / $1,000,000
ROA = 0.1 or 10%
This means that Company XYZ is generating 10% return on each dollar of assets they own. It's important to note that what is considered a "good" or "bad" ROA can vary by industry, so it's important to compare a company's ROA to others in its industry to get a better understanding of its performance.