# Return on Assets Ratio

A company's return on assets ratio is an indicator of its earning with regard to its investments in assets.

WealthHow Staff

Last Updated: Sep 10, 2018

ROA Ratio Calculation

This ratio is calculated in percentage, by dividing a company's net earnings by its average total assets.

The mathematical formula is:

The mathematical formula is:

**ROA****= Net Income ÷ Average Total Assets**

In such a case, the formula for calculating ROA ratio becomes:

**ROA = (Net Income + Interest Expenses - Interest Tax Savings) ÷ Average Total Assets**

Uses of Calculating ROA Ratio

Assessment of Asset Management

ROA gives an idea of how efficiently the management of a company is using its assets to get income. Let's take an example to understand better. A company has a net income of $2 million and total assets of $10 million. Its ratio would be 20%. Now, take another example of a company with the same income, i.e., $2 million, but its assets are worth $ 20 million.

Determination of Investment Decisions

The ROA ratio percentage is used by investors to gauge how effectively a company is converting the money it has in debt and equity, to invest in net income. A higher ratio attracts more investors, and they readily buy stocks of such companies.

Profit Indication

It is used to make comparisons between two companies or within two time periods in the same company. A comparison of the figures within the same company will give an idea of whether investment decision amendments incorporated by the company have been successful in generating more earnings or not.

Determination of Shareholders' Profit

ROA is of top priority to shareholders. A high percentage shows that the company's assets, which include the capital invested by shareholders, have been utilized in the best possible manner to generate high earnings. It is a means to determine the amount of return earned by the shareholders.