Investopedia: What is 'Return On Assets - ROA'?

Return On Assets - ROA

What is 'Return On Assets - ROA'

Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment".

The formula for return on assets is:

Return On Assets (ROA)

Note: Some investors add interest expense back into net income when performing this calculation because they'd like to use operating returns before cost of borrowing.
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BREAKING DOWN 'Return On Assets - ROA'

Highest ROA Stocks in the S&P 500
    Symbol     ROA     Price
   
CBOE
    39.77%     94.53
   
MO
    36.23%     64.97
   
EBAY
    35.00%     35.73
Lowest ROA Stocks in the S&P 500
    Symbol     ROA     Price
   
CHK
    -28.97%     4.96
   
NFX
    -26.61%     28.73
   
PRGO
    -24.13%     74.92

ROA tells you what earnings were generated from invested capital (assets). ROA for public companies can vary substantially and will be highly dependent on the industry. This is why when using ROA as a comparative measure, it is best to compare it against a company's previous ROA numbers or the ROA of a similar company.

The assets of the company are comprised of both debt and equity. Both of these types of financing are used to fund the operations of the company. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment. For example, if one company has a net income of $1 million and total assets of $5 million, its ROA is 20%; however, if another company earns the same amount but has total assets of $10 million, it has an ROA of 10%. Based on this example, the first company is better at converting its investment into profit. When you really think about it, management's most important job is to make wise choices in allocating its resources. Anybody can make a profit by throwing a ton of money at a problem, but very few managers excel at making large profits with little investment.

Things to Remember

    The ROA is often referred to as ROI
    We add the interest expense to ignore the costs associated with funding those assets.

Are you ready to use ROA in your trading strategies? Check out -- ROA And ROE Give Clear Picture Of Corporate Health and Use ROA To Gauge Company’s Profits.
Next Up Rights of Accumulation - ROA

    Return On Assets - ROA
    Rights of Accumulation - ROA
    Cash Return On Assets Ratio
    Average Return
    Return
    Residual Dividend
    Calculated Intangible Value - CIV
    Profitability Ratios
    Capital Intensive
    Return On Assets Managed - ROAM

Rights of Accumulation - ROA
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A right that allows a shareholder to receive reduced sales charges when the amount of mutual funds purchased, plus the amount already held, equals an ROA breakpoint. In addition, there is no time limit on how long the mutual fund needs to be held to qualify for a ROA.
BREAKING DOWN 'Rights of Accumulation - ROA'

For example: You wish to buy $2,000 of Fund ABC with a sales charge of 5.50% to add to your existing $19,000 of the same fund in your account. Given that Fund ABC is linked to an ROA and that the breakpoint is $20,000, you would qualify for a reduced sales charge (i.e. 5.25%). Also, the entire purchase ($2,000) would qualify for the reduced sales charge and not just the amount in excess of $20,000.

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