Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Return on Assets (ROA)

What it is:

Return on assets measures the amount of profit the company generates as a percentage of the value of its total assets.

How it works (Example):

A company's return on assets (ROA) is calculated as the ratio of its net income in a given period to the total value of its assets. For instance, if a company has $10,000 in total assets and generates $2,000 in net income, its ROA would be $2,000 / $10,000 = 0.2 or 20%.

Why it Matters:

The profit percentage of assets varies by industry, but in general, the higher the ROA the better. For this reason it is often more effective to compare a company's ROA to that of other companies in the same industry or against its own ROA figures from previous periods. Falling ROA is almost always a problem, but investors and analysts should bear in mind that the ROA does not account for outstanding liabilities and may indicate a higher profit level than actually derived.

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