The percentage a company earns on its assets in a given year (Year 1, 2, etc.). The calculation is net income divided by end-of-year total assets . The resulting figure is then multiplied by 100.
Benefit
ROA shows how much profit a company generates on its asset base. The better the company, the more profit it generates as a percentage of its assets.
Origin
The company’s net income is found in the annual income statement. The company’s total assets are found in the annual balance sheet.
For the Pros
ROA can be broken down into the product of two ratios:
ROA = Net margin * Asset turnover
Thus a company can generate a high ROA either by adding a lot of value to its products (thus leading to a high profit margin) or by selling a lot of goods (leading to a high asset turnover). A software company will follow the first strategy; a supermarket the second.
Use the following formula to find companies that have dramatically improved their ROAs. The same equation can be used on ROE:
((ROA Year 1 – ROA Year 5) / ROA Year 5) x 100