Return on Assets (ROA)
Categories: Company Valuation, Accounting
The return on investments is the money you make from your investments and it's usually pretty easy to figure out. You invest $10 and you make $5... your returns are $5.
But companies don't just make investments. They sink a lot of money into assets—like land, factories, brand names. How can a company figure out how well it's making money with its assets?
Answer: by figuring out the ROA (Return on Assets). And, yes, there's a formula for that:
ROA = net income / assets
If your company has $1 million in net income and $5 million in assets, that's a ROA of 0.2 or 20%. Is that good? Bad? It depends in the industry and what assets you have.
You want the ROA number to be as high as possible—it means you're squeezing more juice from your assets and really putting them to work.