[Infographics] Return on asset (ROA) | Definition Formula(Explained)

Return on asset is the profit generated on the investments. The higher the value of ROA, the more efficient the management is in generating profit. ROA method is used to generate profitability ratio.

ROA is a measure of the company’s performance. Return on assets (ROA) is a component of return on equity (ROE), both of which can be used to calculate a company’s rate of growth.

Return on assets shows how profitable a company’s assets are in generating revenue.

Return on assets(ROA) infographics by Kamlesh Rode

Return on asset
Return on asset(ROA) infographics created in Figma.

What is Return on asset (ROA)?

Return on asset (ROA) is a component of return on equity (ROE), both of which can be used to calculate a company’s rate of growth. Return on assets shows how profitable a company’s assets are in generating revenue.

It is an indicator of how profitable a company is relative to its total assets. ROA is always displayed as a percentage; the higher ROI is, the better for the investors.

ROA also indicates how the company utilizes its assets in terms of profitability

The formula of Return on asset (ROA)

ROA is calculated by dividing a company’s net income by total assets. As a formula, it would be expressed as:

Return on Assets = Net Income/Total Assets

Important of Return on asset (ROA)

1. ROA denotes how efficient is the management in future prospects.

2. It shows the efficiency of the company in terms of profitability

3. The higher ROI, better for investment decisions.

4. ROA is a true measure of business performance

Cons of Return on asset (ROA)

1. It does not work over Intangible assets and this will not be accounted for in return on assets.

2. It is very difficult to get the exact percentage of ROA in the market. Many companies have businesses in other domains, due to this, it is very difficult to get the data of ROA.

3. Return on an asset does not consider the borrowed capital company takes for future growth.

Difference between ROE and ROA

ROEROA
ROE measures the rate of return on the shareholder’s equity of common stocksReturn on assets shows how profitable a company’s assets are in generating revenue.
Formula
ROE = Net Income/Shareholders’ Equity
Formula
Return on Assets = Net Income/Total Assets  
ROE is sometimes called “return on net worth”ROA is a true measure of business performance  

Read more about ROE

Conclusion

The Return on Asset is a very important ratio, it helps the investor to find the efficiency of the company’s management. In other words, ROA shows the efficiency of the company in terms of generating profits for its shareholders.

Obviously, the higher the ROA, the better it is for the shareholders. In fact, this is one of the key ratios that help the investor identify the key financial value of the company.

ROA is an important factor in the fundamental analysis of a stock company. Read more about fundamental analysis through infographics.

Frequently asked questions

Que: What is a good Return on Asset(ROA)?

Ans: 5% of Return on asset is generally taken into account for the investment.

Que: What is ROA and ROE in the stock market

Ans: ROA is the return on asset and ROE stands for return on equity. ROA related to actual investment and ROE related to equity growth in the stock market

Que: How ROA is calculated?

ROA is calculated by dividing a company’s net income by total assets. As a formula, it would be expressed as Return on Assets = Net Income/Total Assets

Que: What is Bad ROA?

Ans: It is difficult to interpret in the stock market. Low ROA means a company losing or earning low profits

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