How to Calculate Return on Assets (ROA), With Examples

What Is Return on Assets (ROA)?

Return on assets (ROA) is a profitability ratio that shows how much profit a company is generating from its assets. As such, it is seen as an indicator of how efficiently a company’s management is deploying the economic resources it has available. ROA is expressed as a percentage and, in general, the higher the number, the better.

Calculating Return on Assets (ROA)

ROA is usually based on a company’s average total assets, which is calculated by adding its total assets at the end of the year (or other period) to its total assets at the end of the previous year (or other period) and dividing by two.

Average total assets is considered a more accurate measure than simply using the total assets at the end of the latest period. That’s because a company’s assets can vary over time due to the purchase or sale of vehicles, land, or equipment, as well as inventory changes or seasonal sales fluctuations. A company’s total assets can be found on its balance sheet. 

So the formula for ROA is:

$\begin{aligned}&\text{Return on Assets}=\frac{\text{Net Income}}{\text{Total Assets}}\end{aligned}$​Return on Assets=Total AssetsNet Income​​

Note that some simplified computations for ROA will use the total assets for a single current period rather than average total assets, as in our examples. In the banking industry, where using average total assets is the standard, it is often referred to as return on average assets (ROAA).

Example of Return on Assets (ROA)

Below is the balance sheet from ExxonMobil‘s 2023 10-K statement showing its total assets for both 2023 and 2022. Since its 2023 total assets were $376.317 billion and its 2022 total assets were $369.067 billion, its average total assets would be $372.692 billion.

And here is the income statement for 2023 for ExxonMobil from the same 10-K, showing its net income for the year of $36.010 billion:

Putting the two numbers together, ExxonMobil’s ROA was 9.7% ($36.010 billion divided by $372.692 billion). By itself, that number doesn’t tell the whole story. Because different industries can have very different ROAs, a more meaningful analysis would be to compare ExxonMobil’s ROA to that of other major oil companies, such as Chevron and BP.

What Return on Assets (ROA) Means to Investors

Calculating the ROA of a company can be helpful in tracking its profitability over multiple quarters and years as well as in comparing it against similar companies. However, no one financial ratio should be used to determine a company’s financial performance or potential value as an investment. Other common profitability measures that investors can use include return on equity (ROE) and return on invested capital (ROIC).

Interpreting ROAs

When analyzing a company’s ROA, it’s worth bearing in mind that:

• Companies with a low ROA will usually have more assets involved in generating their profits. For example, a railroad or manufacturing company is likely to require a large capital investment in fixed assets.
• Companies with a high ROA usually need fewer assets to generate their profits—for example, a consulting firm or other service business.

As a result, companies with a low ROA tend to have more debt since they need to finance the cost of their assets. Having more debt is not bad as long as management uses it effectively to generate earnings.

A rising ROA tends to indicate that a company is increasing its profits with each dollar that’s invested in the company’s total assets. A declining ROA may indicate that a company made some poor capital investment decisions and is not generating enough profit to justify the cost of those assets. A declining ROA could also indicate that the company’s profits are shrinking due to declining sales or revenue.

For that reason it can often be useful to compare a company’s ROA over multiple accounting periods. One year of a lower ROA may not be a concern if the company’s management team is investing in its future and the company anticipates increased profits over the coming years.

Comparing ROAs

As mentioned, before making any judgments about whether a particular ROA is good or bad, it’s important to compare companies of similar size and in the same industry.

For example, an auto manufacturer with huge facilities and specialized equipment might have an ROA of 4%. On the other hand, a software company that generates the same profit but with far fewer assets might have an ROA of 18%.

At first glance, the car maker’s ROA might appear low as opposed to the software company’s. However, if the automobile industry’s average ROA is 2%, then the auto company’s 4% ROA is outperforming its competitors, signifying that it is making effective use of its resources. And the software company’s 18% ROA will seem far less impressive if its peers in that industry are averaging, say, 20%.

The Bottom Line

Return on assets (ROA) is an important metric for gauging the profitability of a company. It represents a company’s net income as a percentage of total assets. However, it is not the only relevant metric, and investors should make sure to look at the full picture when they compare different companies.