Return on assets

A ratio compares two figures to reveal something neither number shows on its own. Return on assets compares how much profit a company generates against everything it owns, whether that was funded by shareholders or by debt.

Return on assets divides net income by total assets. Unlike return on equity, which only considers the shareholder-funded portion of the business, ROA measures profitability against the full asset base, debt-funded and equity-funded alike.

The formula is:

ROA is typically lower than ROE for the same company. That follows directly from how the balance sheet works: total assets always equals total liabilities plus shareholders equity, so total assets reflects everything the company owns, whether that was funded with borrowed money or with shareholders' capital. Shareholders equity, which ROE uses instead, already has that borrowed money subtracted out, making it a smaller denominator and pushing ROE higher. That gap is informative in itself, a wide gap between ROA and ROE points to a business relying heavily on debt to boost shareholder returns, while a narrow gap suggests a business carrying little leverage.

Like ROE, ROA is most meaningful compared across time or against similar companies, since capital intensive industries naturally carry larger asset bases and post lower ROA than asset-light ones for reasons unrelated to how well they're run.