What is a return on assets?
Return on assets is a ratio that measures how well a company uses its assets to generate profit.
How do you calculate your return on assets?
Return on assets is calculated by dividing the company's net income by its total asset base. The formula is:
Return on assets
=
Net income ÷
Total assets
What are some examples of return on assets?
Here are a few examples to help you understand ROA a bit better:
- If company A has $1 million in total assets and earned $100,000 in net income during a period, its return on assets would be 10%.
- Conversely, suppose company B has $2 million in total assets but only $50K of profits for the same period (a much lower ROA). Then we might say that company B needs to improve efficiency or find ways to generate more profit from those same resources—or perhaps shut down operations entirely.
What is considered a good and bad return on assets?
A good return on assets is in the 10% range. Anything above that is excellent and below 5% is considered harmful. A company with a ROA of 15% or higher is doing very well, while one with 1% or lower is likely in trouble.
If the return on assets is less than one, you lose money. If your ROA is less than the cost of capital, then it means that your company needs to make more money to cover its costs and maintain current operations. In addition, if your ROA is less than the cost of debt (which would be equal to interest payments), then you're losing money on every dollar in debt owed by your company.
Suppose this continues for long enough or gets worse over time. In that case, it could lead to bankruptcy because too much debt will cause financial distress and make it harder for companies to stay afloat—especially if there's no way out of debt through increased revenues or reduced expenses (like cutting back).
