What is the meaning of Return on Assets (ROA)? Any company can use accounting ratios to measure its performance. There are many types of accounting ratios, One of them is the beneficial ratio. Beneficial ratio tells us how profitable any company is or how much profitability it has. Profitability means how capable the company is in earning profit or how much capability the company has to earn profit.
Return on assets (ROA) is a type of profitability ratio. As the name suggests, ROA is the return on assets. As we know how many types of assets are used in any company, any company employs many assets in its business, the purpose is that the company can generate income by using those assets, so we get to know this from ROA. Whether the assets employed by the company have been used properly or not, that is, how well they have been utilized to earn income, the higher the ROA, the better it is considered. The higher the ROA, the better we have used the assets to earn income.
The formula for ROA is ROA = Net Income / Average Total Assets. It means that the net income is equal to the total assets, which means that the value of the assets we have invested in the business is equal to the income we have earned. If it is more than 1, then it is a good thing. It means that we have earned more dollars as income than the amount of assets we have invested. For example, if this ROA is 1.5, then we have earned $1.5 for every $1 of assets invested in the business. And if it is less than 1, like 0.5 or 0.1, then it is not so good. It means that we have invested $1 but in comparison to that we are earning only 0.5 or 0.1. So, this is about (ROA) Return on Assets.