The Return on Assets (ROA) calculator helps you easily calculate ROA. This metric shows investors how efficiently the company invests its assets into net income. The larger the ROA number, the more effectively the company is investing. This is because the company is able to get larger returns from smaller investments.
This article will explain the basic vocabulary associated with Return on Assets (ROA) and will give you a better understanding of how to calculate ROA. By displaying a simple step-by-step example of a company’s ROA, you will grasp a better understanding of a company’s investment success. You can also look at our other financial calculators, for example, the debt to asset ratio (especially useful for companies) or the debt to income ratio (interesting for personal finance purposes).
What is Return on Assets (ROA)?
As mentioned previously, ROA shows investors how effectively a company invests its assets into net income. It’s a metric that indicates a company’s profitability in regard to its total assets. ROA is generally used by an organization’s management, investors, and financial analysts to assess how productively a company is using its assets to generate a profit. To put it simply, a higher ROA means better asset efficiency.
What is a good ROA percentage?
In general, a ROA above 5% is considered good and a ROA above 20% is considered outstanding. Whenever comparing two companies’ ROAs, the companies should always be in the same industry because different industries have very different asset utilization.
Return on Assets (ROA) formula
The Return on Assets (ROA) formula is calculated by dividing a company’s net income by the total assets. As a formula, it’s expressed as:
The metric will return the value in a percentage and the higher the percentage, the more effectively a company is utilizing its assets to generate profit. The next section will dive into an example to paint a clearer picture of ROA.
How to calculate Return on Assets (ROA)
For this example, Company A spends $35,000 on total assets for their company. From those assets, Company A achieved a net income of $4,000. Company B spends $33,000 on total assets for its company while obtaining a net income of $1,000. Using the formula above for Return on Assets we see the ROA for Company A is $4,000 / $35,000 = 11.4%, while Company B has a ROA of $1,000 / $33,000 = 3%. The values displayed by the two companies suggest that Company A, with a ROA of 11.4%, is utilizing its assets much more effectively than Company B, with a ROA of 3%.
As observed from the example, a greater amount of total assets in comparison to net income means that the company is more efficiently investing its assets for the profitability of its company. Companies with a low ROA should reevaluate their current investments and make changes for the following financial time period.