Return on assets (ROA) is a financial metric used to assess how profitable a company is in relation to its total assets. It is a type of return on investment (ROI) measure that indicates how well the company utilizes its assets in generating income. The formula for calculating the return on assets is as follows:
ROA = Net Income / Average Assets
ROA = Net Income / End of Period Assets
Companies in different industries will likely have very different ROA requirements. For capital-intensive industries that usually invest in a large amount of fixed assets (e.g. PP&E) for their daily operations, companies tend to have a lower ROA. It is important to compare the ROA of companies with similar characteristics and operate in the same industry for apple-to-apple comparisons.