Return on assets (ROA) is used as a measure/indicator to know how profitable a company is relative to its assets or the resources it owns or controls. Investors can use ROA to find good stock opportunities because the percentage shows how efficient a company is at using its assets to generate profits. An ROA that rises over time indicates the company is doing a good job of increasing its profits with each investment dollar it spends. A falling ROA indicates the company might have over-invested in assets that have failed to produce revenue growth, a sign the company may be trouble

Calculating Return on Assets (ROA):- To determine ROA, take net income reported for a period and divide that by total assets. To get total assets, calculate the average of the beginning and ending asset values for the same time period.

Return on Assets (ROA) = Net Income/Total Assets

Some analysts take earnings before interest and taxation (EBIT) and divide by total assets:

Return on Assets (ROA) = EBIT/Total Assets

This is a pure measure of the efficiency of a company in generating returns from its assets without being affected by management financing decisions.

What Is a Good ROA?:-

Whichever method you use, the result is reported as a percentage rate of return. A return on assets of 20% means that the company produces $1 of profit for every $5 it has invested in its assets. A falling ROA is a sure sign of trouble around the corner, especially for growth companies. Striving for sales growth often means major upfront investments in assets, including accounts receivables, inventories, production equipment, and facilities. A decline in demand can leave an organization high and dry and over-invested in assets it cannot sell to pay its bills. The result can be a financial disaster.

ROA Hurdles:- Investors usually weigh ROA against the company's cost of capital to get a sense of realized returns on the company's growth plans. A company that embarks on expansions or acquisitions that create shareholder value should achieve an ROA that exceeds the costs of capital. Otherwise, those projects are likely not worth pursuing. Moreover, it's important that investors ask how a company's ROA compares to those of its competitors and to the industry average.

ROA is far from being the ideal investment evaluation tool. There are a couple of reasons why it can't always be trusted. For starters, the "return" numerator of net income is suspect (as always), given the deficiencies of accrual-based earnings and the use of managed earnings. Also, since the assets in question are the sort of assets that are valued on the balance sheet (namely, fixed assets, not intangible assets like people or ideas), ROA is not always useful for comparing one company against another. Some companies are "lighter," with their value based on things such as trademarks, brand names, and patents, which accounting rules don't recognize as assets.