Return on Assets or ROA measures the effectiveness of a company’s assets in generating income for it. Also referred to as Return on Investment, the ROA is calculated by the formula net income divided by the total assets. It is one of the figures investors use to understand how good a company is in managing its assets and converting it into money.
For example…
Let’s take Tara’s architectural consultancy Cool Designers. Tara also has other companies in the building demolition and interior decoration spaces. All three entities own real estate, software, machinery and other assets crucial in conducting their business. If the total value of these assets is four million dollars and the total revenue generated by them is two million dollars, the ROA for Tara’s combined businesses is 50%.
