what is return on assets roa 
the term return on assets roa refers to a financial ratio that indicates how profitable a company is in relation to its total assets corporate management analysts and investors can use roa to determine how efficiently a company uses its assets to generate a profit theresa chiechi investopediaunderstanding return on assets roa the roa metric is commonly expressed as a percentage using a company s net income and average assets a higher roa means a company is more efficient and productive at managing its balance sheet to generate profits while a lower roa indicates there is room for improvement businesses are about efficiency comparing profits to revenue is a useful operational metric but comparing them to the resources a company used to earn them displays the feasibility of that company s existence return on assets is the simplest of such corporate bang for the buck measures it tells you what earnings are generated from invested capital or assets roa for public companies can vary substantially and are highly dependent on the industry in which they function so the roa for a tech company won t necessarily correspond to that of a food and beverage company this is why when using roa as a comparative measure it is best to compare it against a company s previous roa numbers or a similar company s roa the roa figure gives investors an idea of how effective the company is in converting the money it invests into net income the higher the roa number the better because the company is able to earn more money with a smaller investment put simply a higher roa means more asset efficiency a similar valuation concept is a return on average assets roaa roaa uses the average value of assets instead of the current value of the item financial institutions often use roaa to gauge financial performance return on assets formula and calculationroa is calculated by dividing a company s net income by its total assets as a formula it s expressed as for example pretend sam and milan both start hot dog stands sam spends 1 500 on a bare bones metal cart while milan spends 15 000 on a zombie apocalypse themed unit complete with costume let s assume that those were the only assets each firm deployed if over some given period sam earned 150 and milan earned 1 200 milan would have the more valuable business but sam would have the more efficient one using the above formula we see sam s simplified roa is 150 1 500 10 while milan s simplified roa is 1 200 15 000 8 special considerationsbecause of the balance sheet accounting equation note that total assets are also the sum of its total liabilities and shareholder equity both types of financing are used to fund a company s operations since a company s assets are either funded by debt or equity some analysts and investors disregard the cost of acquiring the asset by adding back interest expense in the formula for roa in other words the impact of taking more debt is negated by adding back the cost of borrowing to the net income and using the average assets in a given period as the denominator interest expense is added because the net income amount on the income statement excludes interest expense roa shouldn t be the only determining factor when it comes to making your investment decisions in fact it s just one of the many metrics available to evaluate a company s profitability return on assets roa vs return on equity roe both roa and return on equity roe measure how well a company utilizes its resources but one of the key differences between the two is how they each treat a company s debt roa factors in how leveraged a company is or how much debt it carries after all its total assets include any capital it borrows to run its operations on the other hand roe only measures the return on a company s equity which leaves out its liabilities thus roa accounts for a company s debt and roe does not the more leverage and debt a company takes on the higher roe will be relative to roa thus as a company takes on more debt its roe would be higher than its roa assuming returns are constant assets are now higher than equity and the denominator of the return on assets calculation is higher because assets are higher this means that a company s roa falls while its roe stays at its previous level limitations of roaas noted above one of the biggest issues with roa is that it can t be used across industries that s because companies in one industry have different asset bases from those in another so the asset bases of companies within the oil and gas industry aren t the same as those in the retail industry some analysts also feel that the basic roa formula is limited in its applications being most suitable for banks bank balance sheets better represent the real value of their assets and liabilities because they re carried at market value via mark to market accounting or at least an estimate of market value vs historical cost both interest expense and interest income are already factored into the equation for nonfinancial companies debt and equity capital are strictly segregated as are the returns to each so the common roa formula jumbles things up by comparing returns to equity investors net income with assets funded by both debt and equity investors total assets two variations on this roa formula fix this numerator denominator inconsistency by putting interest expense net of taxes back into the numerator so the formulas would be the federal reserve bank of st louis provided data on u s bank roas which generally hovered under 1 4 from 1984 until 2020 when it was discontinued example of roaremember that roa is most useful for comparing companies in the same industry as different industries use assets differently for example the roa for service oriented firms such as banks will be significantly higher than the roa for capital intensive companies such as construction or utility companies let s evaluate the roa for three companies in the retail industry the data in the table is for the trailing 12 months ttm as of feb 13 2019 every dollar that macy s invested in assets generated 8 3 cents of net income macy s was better than kohl s or dillard s at converting its investment into profits one of management s most important jobs is to make wise choices in allocating its resources and it appears that macy s management in the reported period was more adept than its two peers 