# How to Calculate & Assess Return on Assets

MARISSA HAYDEN
Content Producer · 12 July 2021
Before investing in a stock there’s a bit of research you should do to understand the company you plan to invest in. One financial metric that can help you determine whether a company is worth investing in is ROA or return on assets.

## What is a Return on Assets (ROA)?

ROA is a financial metric that can tell you how much profit a company generates relative to the value of its assets. A company’s assets include all of the resources that it owns or controls and produces as a business.

## Why is it important to understand ROA?

Calculating ROA can indicate how efficiently a company utilises its assets to generate income and can tell an investor how effectively a company is converting its money into income. So, understanding the ROA can be an important aspect of researching how efficiently a company is being run and whether or not it is a good investment.

## How to calculate ROA?

There is a simple calculation that you can use to determine a company’s ROA. This formula is expressed as a percentage.

ROA= Net income / Total assets

## What is Net income and how to find it?

Also known as Net Earnings, Net Income is calculated as sales minus cost of goods sold, general administrative expenses, operating expenses, depreciation, interest, taxes and any other expenses. Typically, you can find this metric on a company’s income statement.

## What is Total Assets and how to find it?

Total asset refers to the total value of assets owned by a company. To find a company’s total assets check their balance sheet.

## Example of using calculating ROA

Let’s take a fictional company as an example: Brenda’s Bakery. In their income statement and balance sheet we can see that their net income was \$12 million and the value of their total assets came to \$258 million.

ROA = 12 million/ 258 million = 0.0465 (4.65%)

Remember, that ROA is calculated as a percentage.

## What is a good ROA?

In general, the higher the ROA the better, it speaks to the efficiency of the company at generating profits. 5% is considered good and an ROA of 20% is considered to be great because the company is earning more money on less investment.

So, in the case of Brenda’s Bakery, based on their ROA it could be a good investment. However, there could be underlying issues and it often takes applying several financial ratios to get a full picture of a company and it’s financial health. For example, ROA doesn’t take into account a company’s debt. ROA is also best used when comparing similar companies or to its own performance.

#### Compare Online Share Trading Accounts with Canstar

If you’re comparing online share trading companies, the comparison table below displays some of the companies available on Canstar’s database with links to providers’ websites. The information displayed is based on an average of six trades per month. Please note the table is sorted by Star Rating (highest to lowest), followed by provider name (alphabetical). Use Canstar’s Online Share Trading comparison selector to view a wider range of online share trading companies. Canstar may earn a fee for referrals.

##### Thanks for visiting Canstar, Australia’s biggest financial comparison site*

Marissa is the Content Producer for the Wealth team at Canstar, and specialises in investment content. Her previous experience has seen her create content for wide range of industries from travel to the legal sector. Follow Marissa on LinkedIn, and Canstar Investor Hub on Facebook.

Similar Topics:

#### Share this article

*We are Australia’s Biggest Financial Comparison Site. Click here to learn more

This advice is general and has not taken into account your objectives, financial situation or needs. Consider whether this advice is right for you. Consider the product disclosure statement before making a purchase decision. Canstar provides an information service. It is not a credit provider, and in giving you information about credit products Canstar is not making any suggestion or recommendation to you about a particular credit product. Research provided by Canstar Research AFSL and Australian Credit Licence No. 437917.