Return on assets (ROA)

The formula

• ROA = 100 · N / A

N is the net income for the year and A the total assets, everything the company owns whoever financed it. The percentage says what each unit of assets earned.

A worked example

A company earns 120,000 on total assets of 1,500,000: ROA = 100 · 120,000 / 1,500,000 = 8%. With equity of 800,000 the same company has an ROE of 15%: the owners’ return is higher because part of the assets is paid for with loans.

Why ROA sits below ROE

Assets are equity plus debt, so the denominator here is larger than in ROE and the percentage smaller, for any company with debt. The gap between the two is the effect of borrowing. ROA is the figure that compares how well two companies use what they have, regardless of how they paid for it.

After or before interest

This page divides net income, after interest, by all assets, which is how the ratio is usually quoted in English-language reports. A stricter version takes the profit before interest, since the lenders’ share of the assets earned the interest they were paid; that is the convention of the Swedish räntabilitet på totalt kapital and it reads higher. Say which one a comparison uses.

Common mistakes

• Dividing by equity. That is ROE.
• Using assets at book value as if they were current. Old assets written down to little make the ROA look better than a new competitor’s.
• Comparing across industries. A software company and a shipping line need different amounts of assets per unit of profit.

Frequently asked questions