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What is Return on Assets?

Return on Assets, or ROA, is an efficiency ratio which quantifies how much profit a company can generate with the assets it has.

Return on Assets is a ratio of the net income of a company divided by the amount of assets it has on the books. It can also be synonymous with Return on Investment (ROI), at least at a corporate level.

Theoretically this gives analysts an idea of how much profit a company could generate by buying more equipment or other assets, or how efficiently they use the assets in which they have invested. Comparing companies in a specific industry to their peers with ratios such as this one can be illuminating.

If a company is using a high percentage of its net income year after year to reinvest in the company by buying and upgrading assets, instead of using this profit margin in other ways, and the return on assets is not very high, the shareholders or board members might use this information to influence the company to take a different direction with the use of profits. Other options might include paying out more dividends to investors, liquidating some assets to invest in different ones, and so forth.

Keywords: opportunity cost, retained earnings, profit margin, net income, board member, liquidation value, return on investment (ROI), return on assets (ROA),