Return on Assets (ROA) - Definition, Example and Calculation: FKnol.com

Return on Assets (ROA) is a leading profitability indicators which measures the returns generated by a company relative to the capital invested in the assets of the company. It is one the commonly used financial ratios that provides a simple measure of how efficiently the management of a company is utilizing its assets' capital to generate earnings.
The figure of ROA is usually represented as a percentage, and a higher value is preferred. In contrast to Return on Equity (ROE) which solely focuses on the equity capital of the company, the Return on Assets (ROA) also takes the company's debt into account, thereby representing an all-inclusive picture of earnings efficiency.
A higher ROA value indicates better asset efficiency of a company.

Formula to Calculate Return on Assets (ROA)

Calculation of ROA ratio requires two key numbers which are readily available in the financial statements on quarterly and annual basis, as declared by the company during results declaration.

Return on Assets (ROA) = Net Income / Total Assets

where,
◐ Net Income = Annual Net Income, which is available as a standard line item in company's annual Income Statement, and
◐ Total Assets is the line item usually titled 'Total Assets' under the section 'Long-Term Assets' or 'Current Assets' of the Balance Sheet.

Since these two figures are easily available, one may simply need to pick the values from the statements and use in the calculations. However, it is always better to look under the hood to get the precise clarity for ease of understanding and accuracy.
The net income is the amount of income generated by the company for the given year, after deducting all necessary expenses and taxes. The total assets is the sum-total of 'Total Current Assets' which includes Cash and Cash Equivalents, Short-Term Investments, Net Receivables, Inventory, and Other Current Assets (all line items in the Balance sheet) and Long-Term Investments, Fixed Assets, Goodwill, Intangible Assets, Other Assets, and Deferred Asset Charges (again, all standard line items readily available in the Balance sheet).

One must note that ROA ratio is calculated on an annual basis, so data from company's annual financial statements should be taken into consideration. The ROA figure is usually expressed as a percentage (%).

Example of Return on Assets (ROA)

In this article, we will look at the following real-world examples of recent times for calculating ROA.

ROA Example No. 1:
The NASDAQ-listed Amazon.com Inc (AMZN) belongs to the Consumer Services sector and is categorized under the Catalog and Specialty Distribution subsector. Amazon.com, Inc., incorporated on May 28, 1996, offers a range of products and services through its Websites. The Company operates through three segments: North America, International and Amazon Web Services ...Detailed Company Profile.
As per the annual results dated Jan 31, 2021, the AMZN stock has reported the following figures for:

Financial Item	Value (in USD thousands)
Net Income (from Income Statement)	21,331,000
Total Assets (from Balance Sheet)	321,195,000
Return on Assets (ROA)	= (Net Income / Total Assets)
	= 21,331,000 / 321,195,000
	= 6.64%

In this case of AMZN stock, the ROA value is positive, which indicates that company managed to generate income during the given year based on the assets. The company generated $6.64 for every $100 it used as its Total Assets.

ROA Example No. 2:
The NYSE-listed Wal-Mart Stores, Inc. (WMT) belongs to the Consumer Services sector and is categorized under the Department Specialty Retail Stores subsector. Walmart Inc. engages in the retail and wholesale operations in various formats worldwide. The company operates through three segments: Walmart U.S., Walmart International, and Sam's Club. It operates ...Detailed Company Profile.
As per the annual results dated Jan 31, 2021, the WMT stock has reported the following figures for:

Financial Item	Value (in USD thousands)
Net Income (from Income Statement)	13,510,000
Total Assets (from Balance Sheet)	252,496,000
Return on Assets (ROA)	= (Net Income / Total Assets)
	= 13,510,000 / 252,496,000
	= 5.35%

In this case of WMT stock, the ROA value is positive, which indicates that company managed to generate income during the given year based on the assets. The company generated $5.35 for every $100 it used as its Total Assets.

ROA Example No. 3:
The NASDAQ-listed Apple Inc. (AAPL) belongs to the Technology sector and is categorized under the Computer Manufacturing subsector. Apple Inc., incorporated on January 3, 1977, designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players. The Company sells a range of related ...Detailed Company Profile.
As per the annual results dated Sep 26, 2020, the AAPL stock has reported the following figures for:

Financial Item	Value (in USD thousands)
Net Income (from Income Statement)	57,411,000
Total Assets (from Balance Sheet)	323,888,000
Return on Assets (ROA)	= (Net Income / Total Assets)
	= 57,411,000 / 323,888,000
	= 17.73%

In this case of AAPL stock, the ROA value is positive, which indicates that company managed to generate income during the given year based on the assets. The company generated $17.73 for every $100 it used as its Total Assets.

Significance of Return on Assets (ROA)

The ROA measure is one of the important financial ratios used by financial analysts and managers to analyze a company's profitability based on its assets (and associated capital). As a company invests sizeable capital to buy, lease or pay for various assets, it gives a fair indication about how efficient the company management in utilizing the assets.
It is used to compare a company's performance between different periods, or to compare the performance of two different companies that belong to the same sector. One should note that generally ROA is compared for companies of similar size and scale. Efficiency of asset utilization may vary depending upon the size of the company and the scale of its operations.

Interpretation of ROA Value

The ROA value calculation is essentially - How much net income did the company generate for every dollar of asset capital it used during the year?

Companies of different industries will have have different ranges for ROA. For instance, a company like WalMart is operation intensive and needs to spend a lot on its assets and operations. This increases the asset size in the denominator of the formula, and hence such companies will have lower ROA. On the other hand, technology companies may not have that much spend on assets as they can allow employees to work from home thereby spending minimal on office space and the likes. This increases the ROA.

Comparing ROA Values

◐ ROA Values can be computed and compared on annual basis, depending upon which financial statements are available and the time horizon being analyzed. One must use similar time-periods for realistic comparison.
◐ Comparisons should be made among companies of similar size of business and operations, as those with high asset base may have certain advantages over those with limited assets.
◐ Companies of same industry sector should be compared for ROA figures.
◐ While making same company comparison over different time horizons, one should look for improving performances in ROA value over the years.
◐ ROA value can be used to determine which companies are asset-intensive, and which are asset-light.

Drawbacks of Return on Assets

◐ Unfortunately, ROA cannot be used to compare companies which belong to different industry sectors.
◐ Similarly, ROA is not recommended to compare companies with different size and scale of business. A very large company like WalMart or Amazon will have a lot of advantages in utilizing and negotiating price-terms for asset use, compared to a small sized company.
◐ It is recommended to look at ROA in addition to Return on Equity (ROE) and Return on Capital Employed (ROCE).

What is a good range for ROA Values?

While ROA values will vary from one industry sector to the other, usually the ROA values above 20 percent are considered to be outstanding. Anything between 10 percent to 20 percent is considered to be excellent, while anything between 5 percent and 10 percent is considered good.

The Bottom Line

Like any other financial ratio, Return on Assets (ROA) has its set of own benefits and drawbacks. Solely looking at ROA value may not provide the clear profitability potential of a company's efficiency based on its asset capital and related figures. It is advisable to use ROA in conjunction with other similar financial ratios.