Open an Account
Trade Now
  • Markets
  • Products
  • Research
  • Partner with us
  • Blog
  • Refer A Friend
Open an Account
Trade Now
  • Markets
  • Products
  • Research
  • Partner with us
  • Blog
  • Refer A Friend
Home » Blog » Stock Market » What is Return on Assets (ROA)? Meaning, Formula, Ratio, and Examples
Religare Broking by Religare Broking
May 5, 2025
in Stock Market
0

What is Return on Assets (ROA)? Meaning, Formula, Ratio, and Examples

What is Return on Assets
  • Last Updated: May 05,2025 |
  • Religare Broking

Return on Assets (ROA) is a key financial metric that measures a company’s profitability relative to its total assets. It indicates how efficiently a company utilises its assets to generate net income. Understanding ROA helps investors, analysts, and business owners assess a company’s financial health and compare its performance with industry benchmarks. This article explores the meaning, importance, formula, and practical applications of ROA, offering a comprehensive guide to this essential financial ratio.

Definition and Importance

Return on assets evaluates how a business utilises its existing assets to create profits. A typical financial assessment tool, ROA, shows the company’s health level to investors and stakeholders through percentage data analysis. An enterprise with greater ROA yields better returns on its resource investment for creating profits. A reduced ROA rate reveals that the business fails to use its resources efficiently.

Types of Assets

Companies possess two major types of assets:

  • Tangible assets: Includes land, buildings, vehicles, and cash.
  • Intangible assets: Includes patents, trademarks, and intellectual properties (IPs).

Firms investing in more tangible assets usually achieve lower returns than organisations using intangible assets to generate greater returns on assets. Organisations with higher capital investment in assets must dedicate more resources to acquiring and maintaining these assets, which reduces the profitability percentage.

Why is ROA Important?

Asset utilisation efficiency is the main factor distinguishing one business from others in its market. High ROA attracts investor interest because such businesses consistently generate stable revenues. Businesses should enhance their operations when ROA results indicate poor performance. Evaluating ROA helps:

  • Identify efficiency in asset usage.
  • Assess investment potential.
  • Compare company performance within the same industry.

Understanding the ROA of a company is crucial because investors wish to know how well a company can convert its assets into earnings. Moreover, a lower return on assets helps a company identify deficiencies and work on them accordingly. Hence, return on assets is a crucial indicator of how a company is performing, helping it achieve success by taking corrective actions on time.

ROA Formula

Return on Assets (ROA) is calculated using the formula:

ROA = (Net Profit / Total Assets) × 100

Since a company’s asset value changes over time, a more accurate approach is to use the average asset value in the calculation:

ROA = (Net Profit / Average Assets) × 100

This formula helps measure how efficiently a company uses its assets to generate profit. A higher ROA indicates better financial performance and asset utilisation.

Example Calculation: Comparing Two Companies

Consider two companies:

  • AC Ltd: Net profit of ₹1,00,000 and total assets of ₹10,00,000.
  • YZ Ltd: Net profit of ₹2,00,000 and total assets of ₹25,00,000.

ROA Calculation:

  • AC Ltd: (₹1,00,000 / ₹10,00,000) × 100 = 10%
  • YZ Ltd: (₹2,00,000 / ₹25,00,000) × 100 = 8%

Although YZ Ltd has higher earnings, AC Ltd is more efficient in converting assets into profits.

What is a Good ROA?

A good general benchmark for determining ROA value might be:

  • 5% or more: Decent efficiency.
  • 20% or more: Excellent performance.

Industry-Specific Comparisons

ROA depends on the industry. For example, a manufacturing company with a 6% ROA could still perform better than its peers in the industry. In contrast, a technology firm with a 15% ROA might underperform compared to its sector’s standard of 20% or higher. Hence, variance among industries becomes critical in making such comparisons.

ROA can be misleading if companies from different industries are compared. For instance, comparing the ROA of a tech firm against that of a manufacturing firm would not produce a fair picture of efficiency because their asset structures and capital requirements differ.

ROA vs. ROE

ROA and Return on Equity (ROE) are often compared but differ in scope:

  • ROA: Shows profitability levels by calculating all assets, including debt-fed assets.
  • ROE: The Return on Equity analysis determines profitability through a shareholder-equity assessment that eliminates debt from calculations.

In a debt-free company, ROA and ROE would be equal. However, with debt financing, ROE is usually higher. The main difference between ROA and ROE lies in how the company’s debt is accounted for. Shareholder equity and total assets will be equal without debt, making ROA and ROE the same.

Drawbacks of ROA

Although ROA is an informative measure, it has some drawbacks:

  • Industry Differences: The measures of ROA exhibit large variations between industries that use substantial assets versus those with minimal assets.
  • Accounting Practices: Asset valuations can differ depending on depreciation methods and financial adjustments.
  • Debt Influence: The ROA figures from businesses with significant debt amounts can become distorted.
  • Limited Scope: The evaluation of the financial state with ROA shows limitations because it fails to understand corporate finances fully. Investors must combine ROE and ROI evaluation with other indicators to establish a full assessment.

Holistic Financial Analysis

The calculation of ROA does not reveal important business performance aspects, including market competitiveness, future growth potential, and operational efficiency beyond asset usage rates. Other than asset efficiency areas, analysts and investors scrutinise companies through multiple financial indicators during their assessment processes.

Conclusion

Return on Asset encapsulates how well the use of corporate assets leads to profitability by measuring how effectively a company employs its resources to generate profit. The ratio helps investors understand asset utilisation in relation to profitability. Using it exclusively may be misleading. Rather, an analysis in conjunction with other financial measurements and by comparison with industry tangents would be more useful.

Investors must look at this context and other measures for complete financial analysis. While a strong value in ROA shows an efficient business, it remains an industry-dependent trend. Evaluating ROA against other metrics gives a clear understanding of a company’s financial health.

 

Tags: ROA FormulaReturn on AssetsROA Calculation

Navigate Stock Market Trends & Invest with Precision

Open Stock Trading Account
Religare Broking

Religare Broking

Related Posts

Top ETFs In India
Stock Market

Top ETFs In India

May 16,2025

Top Gold ETFs in India
Stock Market

Top Gold ETFs in India

May 16,2025

Highest Dividend Yield Stocks In India
Stock Market

Highest Dividend Yield Stocks In India

May 16,2025

Lessons from legendary investor Warren Buffet
Stock Market

Lessons from Legendary Investors: What We Can Learn from Warren Buffett and Others

May 07,2025

Analysing the Impact of Interest Rates on Stock Market
Stock Market

Analysing the Impact of Interest Rates on Stock Market

May 07,2025

Building an Emergency Fund: The Foundation of Financial Security
Stock Market

Building an Emergency Fund: The Foundation of Financial Security

May 07,2025

Disclaimer:This blog is written exclusively for educational purpose. Any stock mentions in the blog are examples and not recommendations. Please refer to our research reports or analyst recommendations for stock ideas.

No Result
View All Result

Open a Free Demat & Trading Account

Please enter valid name
Please enter valid phone

Category

  • Income Tax (1)
  • Commodity Trading (16)
  • Saving Schemes (12)
  • Derivatives Trading (80)
  • Currency Trading (4)
  • TradingView (2)
  • Margin Trading (2)
  • National Pension Scheme (2)
  • Algo Trading (2)
  • Stock Market (166)
  • Online Share Trading (103)
  • Demat Account (38)
  • Mutual Funds (45)
  • IPO (26)
  • Indian Market & Economy (8)
  • Income Tax (15)
  • Uncategorized (1)

Popular Blogs

What are the Major Types of Trade in the Indian Stock Market?
Debt-to-Equity Ratio: A Comprehensive Guide
What is Relative Strength Index (RSI)?
What Are Shares?
Understanding the Concept of NISM Certifications

Latest Blogs

Top ETFs In India
Top Gold ETFs in India
Highest Dividend Yield Stocks In India
What Are the Best Swing Trading Strategies?
Option Trading Strategies for Experienced Traders in 2025
Top Risk Management Techniques for Active Traders
How to Select Stocks for Swing Trading
Scalping vs Day Trading: Which Strategy is Best for Fast Gains?
IPO GMP – Latest IPO Grey Market Premium
Stock Market for Beginners: Ten Great Ways to Learn Stock Trading
Learn More About Stock Market


Markets

  • Stock Market Live
  • Derivatives
  • Commodities
  • Currency
  • Upcoming IPO
  • Listed IPO

Products

  • Overview
  • Equity
  • Derivatives
  • Commodities
  • Currency
  • Margin Trading Facility
  • IPO
  • IPO GMP

Services

  • Tin FC
  • NPS
  • DSC
  • Open Demat Account
  • Open Trading Account

Research

  • Investment Ideas
  • Trading Calls
  • Research Reports
  • Blog
  • Knowledge Centre
  • Stock Market Holidays
  • NSE Holidays
  • BSE Holidays

Support

  • Contact Us
  • Locate Us
  • Downloads
  • Margin Calculator
  • Margin Matrix
  • Feedback
  • Activation Key
  • Demat Account FAQs
  • Trading Account FAQs
  • About Us
  • Notification
  • Disclaimer
  • Privacy Policy
  • Terms Conditions
  • Rules Regulations
  • Corporate Information
  • Educational Note For Clients On PMLA
  • Partner with Us
Important Links
  • NSE
  • BSE
  • SEBI
  • MCX
  • NCDEX
  • MSEI
  • NSEL
  • IRRA
Investor Complaints
  • NSE
  • BSE
  • MCX
  • SEBI
  • SEBI SCORES
  • NCDEX
  • MSEI
  • SMARTODR
E-Voting Facility
  • NSDL
  • CDSL
Upcoming IPO
  • OYO IPO
  • Yatra Online IPO
  • Ixigo IPO

Unified Portal Version No.1.0.0.2

Copyright 2010 Religare. Trademarks are the property of their respective owners. All rights reserved. Religare Broking Limited (CIN: U65999DL2016PLC314319), Registered Office: 802-815B, 8th Floor, Gopal Das Bhawan, 28-Barakhamba Road, Connaught Place, New Delhi -110001
Telephone No.: +91-011-49871213 | Fax: +91-011-49871189
E-mail: wecare@religareonline.com

Member Religare Broking Limited (RBL) : SEBI Regn. No. INZ000174330 NSE CM, F&O, CD TM Code: 06537 Clearing Member (F&O) No. M50235; BSE CM, F&O, CD, CO Code: 3004 Clearing No: 3004; MSEI CM, F&O, CD, TM Code: 1051 | MCX Membership No. 56560 | NCDEX Membership No. 01276 | AMFI-registered Mutual Fund Distributor ARN No.139809.

Member Religare Commodities Limited (RCL) : Regn No. MCX 10575 | NCDEX 00109|NeML 10042|NSEL 10180 |SEBI Registration No. MCX/NCDEX :INZ000022334.

Depository Participant : Religare Broking Limited (RBL) - NSDL: DP ID: IN 301774 | SEBI Regn. No: IN-DP-385-2018 | CDSL DP ID: 30200 | SEBI Regn. No: IN-DP-385-2018

Religare Broking Limited(RBL) : Research Analyst SEBI Regi. No : INH100006977

Religare Broking Limited(RBL) : Registrars to an issue and share Transfer Agents (RTA) - SEBI Regi. No : INR000004361

Religare Broking Limited(RBL) : Corporate Agent (Composite) - IRDA Regi. No : CA0581

Religare Broking Limited(RBL) : National Pension System - Point of Presence (NPS-POP) - PFRDA Regi. No : POP01092018

Advisory for Investors

  • Investor Charter Stock Broker
  • Investor Charter Research Analyst
  • Investor Charter of Depository Participant
  • Advisory KYC Compliance
  • Investor Charter of Registrars to an issue and share Transfer Agents (RTA)
  • For Reporting of Cyber attack/incident Click here..!!
  • Details of Client Bank Accounts of Religare Broking Limited
  • How to Link Your Aadhaar Number with Demat Account
  • How to link Aadhaar Card with your PAN Card
  • How to Open a Demat & Trading Account Online
  • Member Details
  • SOP - Centralized mechanism for reporting the demise of an investor through KRAs
  • SEBI Investor Website
  • Quiz-NFL-Banner

ATTENTION INVESTOR

-- Stock Brokers can accept securities as margin from clients only by way of pledge in the depository system w.e.f. September 1, 2020.

-- Update your mobile number & email Id with your stock broker/depository participant and receive OTP directly from depository on your email id and/or mobile number to create pledge.

-- 20% upfront margin of the transaction value to trade in cash market segment.

-- Investors may please refer to the Exchange's Frequently Asked Questions (FAQs) issued vide circular reference NSE/INSP/45191 dated July 31, 2020 and NSE/INSP/45534 dated August 31, 2020 and other guidelines issued from time to time in this regard.

-- Check your Securities /MF/ Bonds in the consolidated account statement issued by NSDL/CDSL every month.

-- Prevent unauthorized transactions in your account - Update your mobile numbers/email IDs with your stock brokers. Receive information of your transactions directly from Exchange on your mobile/email at the end of the day - Issued in the interest of Investors.

-- Prevent Unauthorized Transactions in your demat account Update your Mobile Number with your Depository Participant. Receive alerts on your Registered Mobile for all debit and other important transactions in your demat account directly from Depository (NSDL/CDSL) on the same day issued in the interest of investors.

--If you have any grievance you may reach Religare Broking Limited at igreligare@religare.com & Religare Commodities Limited at ig.commodities@religare.com.
If the complaint does not get redressed within 30 days, the complainant may use SCORES to submit the grievance.

--Filing complaint on SEBI SCORES – Easy & quick
a. Register on SCORES portal.
b. Mandatory details for filing complaints on SCORES - Name, PAN, Address, Mobile Number, E-mail ID.
c. Benefits - Effective Communication & speedy redressal of the grievances

-- No need to issue cheques by investors while subscribing to IPO. Just write the bank account number and sign in the application form to authorise your bank to make payment in case of allotment. No worries for refund as the money remains in investors account.

-- KYC is one time exercise while dealing in securities markets - once KYC is done through a SEBI registered intermediary (broker, DP, Mutual Fund etc.), you need not undergo the same process again when you approach another intermediary.

-- Trading and Demat Accounts opened under Insta Plan will not be eligible for dealing through branches.

-- Please note that by submitting your mobile and email on our website, you are authorizing us to Call/SMS/Whtsapp/RCS/Email you even though you may be registered under DNC. We shall Call/SMS you for a period of 12 months.

No Result
View All Result
  • Products
  • Research
  • Career
  • Partner with us

© 2021 RELIGARE -Designed By Religare.

Open Demat Account
Please enter valid name
Please enter valid phone

Open a FREE Demat
& Trading Account

Invest in Stocks, IPOs, F&O &
Mutual Funds

Please enter valid name
Please enter valid phone
religare logo

Get better recommendations, Make better investments.

Daily Stock Suggestions from Leading Experts!

By signing up, you agree to receive updates on SMS, Email & WhatsApp