Return on Assets (ROA): How to Calculate & Examples | Jirav
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What is Return On Assets?
ROA is a financial ratio that measures how effectively a company is using its assets to generate profits. It’s a key indicator of a company's efficiency and profitability, as it shows how much profit a company is able to generate from each dollar of assets it owns.
Why Return On Assets Is Important
ROA is an important metric for several reasons. First, it helps investors and analysts assess a company's financial performance and compare it to other companies in the same industry. Additionally, it can help a company identify areas where it can improve its efficiency and profitability by reallocating its assets or changing its business strategy. Finally, ROA can be used as a benchmark to measure a company's performance over time and to track its progress towards achieving its financial goals.
How to Calculate Return On Assets
ROA is calculated by dividing a company's net income by its total assets. The formula for ROA is as follows:
ROA = Net Income / Total Assets
For example, if a company has a net income of $100,000 and total assets of $1,000,000, its ROA would be:
ROA = $100,000 / $1,000,000 = 0.10 or 10%
This means that for every dollar of assets the company owns, it generates 10 cents of profit.
