Is Return on Assets (ROA) a Percentage?
Understand how the Return on Assets ratio distills financial data into a clear indicator of a company's ability to generate profit from its assets.
Financial ratios are tools for evaluating a company’s performance. Return on Assets (ROA) is an indicator that measures a company’s profitability in relation to its total assets. It provides a view into how efficiently management is using its economic resources to generate earnings.
The ROA Formula and its Result
The most common formula to calculate Return on Assets is Net Income divided by Total Assets. Net Income is found on a company’s income statement and represents its profit after all expenses, including taxes, have been paid. Total Assets are listed on the balance sheet and include everything the company owns, such as cash, inventory, and property. Because asset values can change throughout the year, it is more accurate to use the average total assets over a period, calculated by adding the beginning and ending asset values and dividing by two.
While common, this formula has an inconsistency, as Net Income is the profit available to shareholders, while Total Assets are funded by both debt and equity. To create a more accurate measure of asset efficiency, some analysts use an adjusted formula that adds the after-tax interest expense back to Net Income. This approach better reflects how well management is using all of its economic resources—regardless of financing—to generate earnings.
When you divide the earnings figure by the total assets, the result is a decimal. To make this figure more intuitive and comparable, it is multiplied by 100 to be expressed as a percentage. For instance, if a company has a net income of $100,000 and total assets of $1,000,000, the ROA calculation is $100,000 / $1,000,000, which equals 0.10. Multiplying this by 100 converts it to an ROA of 10%.
Interpreting the ROA Percentage
The ROA percentage provides a measure of managerial efficiency. It reveals how much after-tax profit a company generates for every dollar of assets it controls. Using the previous example, an ROA of 10% means the company produces ten cents of profit for every dollar’s worth of assets on its books.
A primary use of the ROA percentage is to track a company’s performance over time. A rising ROA suggests that management is becoming more effective at converting its investments into profits. Another use is for comparison against direct competitors within the same industry. A “good” ROA is highly relative and depends heavily on the industry context.
Industries that are asset-heavy, such as manufacturing or transportation, require large investments in equipment and facilities, which leads to lower average ROAs. In contrast, asset-light industries, like software development or consulting firms, have fewer physical assets and can generate profits with a smaller asset base, resulting in higher average ROAs. Therefore, comparing the ROA of a car manufacturer to that of a technology firm would not provide a useful insight.