Quick Summary
ROA measures the return generated per rupee of assets owned by the company.
Return on Assets (ROA) is a financial ratio that indicates how profitable a company is in relation to its total assets. It gives investors an idea of how efficiently the company is converting its assets into net income.
ROA Formula
ROA = (Net Income / Total Assets) × 100
Or using EBIT (pre-interest):
ROA = (EBIT / Total Assets) × 100
Example
If a company has:
- Net Income: ₹30 lakhs
- Total Assets: ₹300 lakhs
Then ROA = (₹30 / ₹300) × 100 = 10%
Interpretation
- Higher ROA indicates better asset utilization
- Capital-intensive industries typically have lower ROA
- Service companies usually have higher ROA
- Compare with industry peers for meaningful analysis
ROA vs ROE
- ROA considers all assets (debt + equity financed)
- ROE considers only equity
- ROA will always be lower than or equal to ROE
- Difference shows impact of financial leverage
Key Points
- Measures asset utilization efficiency
- Higher ROA indicates better performance
- Varies significantly by industry
- Always lower than or equal to ROE
- Industry comparison essential