Return on Asset Definition

Return on asset (ROA) reveals how much profit a company earned in comparison to its overall asset. The value of ROA varies from industry and company. In general, the higher the value, the better a company is.

Return on Asset Formula

Return on Asset = Net income ÷ Average asset
Or = Net profit margin * Asset turnover

Return on Asset Calculation

Example: a company has $2,000 in net income, and $20,000 in average asset. Return on equity = 2,000 / 20,000 = 10%
This means that has $0.1 of net income for every dollar of asset invested.

Applications

Return on assets measures profit against the assets a company used to generate revenue. It is an important indicator of the asset intensity of a company. A lower ratio means a company is more asset-intensive, and vice versa. Additionally, a more asset-intensive company needs more money to continue generating revenue. Return on asset ratio is useful for investors to assess a company’s financial strength and efficiency to use resources. It is also very important for management to measure its performance against its planned business goals, or market competitors.
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Resources
For statistical information about industry financial ratios, please go to the following websites: www.bizstats.com and www.valueline.com.

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