ROA (Return on Assets)

Return on assets measures how efficiently a company turns its resources into profit. It is calculated as net income divided by average total assets, expressed as a percentage.

Example: a company has net income of $40 million and average total assets of $800 million. Its ROA is 5%.

Unlike return on equity, ROA includes assets financed by debt as well as by shareholders. That makes it less affected by leverage and a useful check on ROE. If a company has a high ROE but a low ROA, a large part of its return likely comes from borrowing.

What counts as a good ROA depends strongly on the industry. Banks hold huge amounts of assets and typically have low ROAs, often around 1%, while asset-light businesses such as software companies can have much higher figures. Comparing companies within the same sector, or a company with its own past, is the most meaningful approach.

Some analysts use a variation that adds interest expense back to net income, so that the figure reflects returns to all capital providers, not just shareholders.