Short definition: Return on assets (ROA) is a financial ratio that measures a company’s profitability by indicating how efficiently it generates profit from its total assets.
Explanation: ROA is expressed as a percentage and is calculated by dividing a company’s net income by its average total assets. It provides insights into how well a company utilizes its assets to generate earnings. A higher ROA signifies that a company is more effective at using its assets to produce profits.
Example: If a company has a net income of $500,000 and average total assets of $5 million, its ROA would be 10%.
Additional information (optional): ROA is a valuable tool for comparing the profitability and efficiency of companies within the same industry or sector. It can help investors assess a company’s ability to generate returns on its invested capital. However, ROA should not be the sole metric used to evaluate a company, as it can be influenced by various factors, such as industry-specific characteristics and accounting policies.