How to Calculate Return on Assets (ROA) With Examples

What Is Return on Assets (ROA)?

Return on assets is a profitability ratio that provides how much profit a company can generate from its assets. In other words, return on assets (ROA) measures how efficient a company's management is in earning a profit from their economic resources or assets on their balance sheet.

ROA is shown as a percentage, and the higher the number, the more efficient a company's management is at managing its balance sheet to generate profits.

Calculating Return on Assets (ROA)

Average total assets are used in calculating ROA because a company's asset total can vary over time due to the purchase or sale of vehicles, land, or equipment, as well as inventory changes or seasonal sales fluctuations. As a result, calculating the average total assets for the period in question is more accurate than the total assets for one period. A company's total assets can be found on the balance sheet. 

The formula for ROA is:

Example of Return on Assets (ROA)

Exxon Mobil Corporation (XOM)

Below is the balance sheet from Exxon's 10K statement showing the 2021 and 2020 total assets. Note the differences between the two, and how this will affect the ROA.

Below is the income statement for 2021 for Exxon according to their 10K statement:

Exxon's ROA is more meaningful when compared to other companies within the same industry.

Here are the 2021 ROAs for comparable companies.

What Return on Assets (ROA) Means to Investors

Calculating the ROA of a company can be helpful in comparing a company's profitability over multiple quarters and years as well as comparing to similar companies. However, no one financial ratio should be used to determine a company's financial performance.

Interpreting ROA

When analyzing a company's ROA, the following tends to be applicable:

• Companies with a low ROA usually have more assets involved in generating their profits
• Companies with a high ROA usually have fewer assets involved in generating their profits

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

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

It's important 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 it's forecasted to increase profits over the coming years.

Comparing ROA

It's important to compare companies of similar size and industry. For example, banks tend to have a large number of total assets in the form of loans and investments. A large bank might have $2 trillion in assets and generate similar net income to an unrelated company in another industry. Although the bank's net income might be similar and have high-quality assets, its ROA might be lower than the unrelated company. The larger total asset figure must be divided into the net income, creating a lower ROA for the bank.

For example, an auto manufacturer with huge facilities and specialized equipment might have a ROA of 4%. On the other hand, a software company that sells downloadable programs that generates the same profit but with fewer assets might have a ROA of 18%. At first glance, the manufacturer's 4% ROA might appear low versus the software company. However, if the auto industry's average ROA is 2%, the auto company's 4% ROA is outperforming its competitors.

When utilizing return on assets to compare productivity across businesses, it's important to take into account what types of assets are required to function in a given industry, rather than merely comparing the figures.

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.