return on assets

return on assets
Fin
a measure of profitability calculated by expressing a company’s net income as a percentage of total assets.
Abbr. ROA
EXAMPLE
Because the ROA formula reflects total revenue, total cost, and assets deployed, the ratio itself reflects a management’s ability to generate income during the course of a given period, usually a year.
     To calculate ROA, net income is divided by total assets, then multiplied by 100 to express the figure as a percentage:
Net income /total assets × 100 = ROA
If net income is $30, and total assets are $420, the ROA is:
30 /420 = 0.0714 × 100 = 7.14%
     A variation of this formula can be used to calculate return on net assets (RONA):
Net income /fixed assets + working capital = RONA
And, on occasion, the formula will separate after-tax interest expense from net income:
Net income + interest expense /total assets = ROA
It is therefore important to understand what each component of the formula actually represents.
     Some experts recommend using the net income value at the end of the given period, and the assets value from beginning of the period or an average value taken over the complete period, rather than an end-of-theperiod value; otherwise, the calculation will include assets that have accumulated during the year, which can be misleading.

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