Return on Assets

Return on Assets (RoA) signifies the company’s profitability in relation to its total assets. It reflects how efficient the management is in using its assets to generate income. It can also be referred to Return on Investment as it tells you what income is generated from the invested capital. RoA is expressed as a percentage.

Return on Assets = Net Income / Total Assets * 100

Let us take an example of Adani Power and Torrent Power for FY 2018:

Based on the above example, it is evident that Torrent Power has been using its assets more efficiently as compared to Adani Power.

The operations of the company are funded by debt and equity which form the assets for a company.

The Return on Assets figure enables investors to analyse how effectively the company converts the money invested in Assets into Net Income.

Higher the RoA the better, because company is earning more money on less investment. Like other financial ratios, RoA varies with each industry.

Return on Assets is used by analysts to compare companies within a sector. It can either be the same company’s previous year RoA with the current RoA or return ratio of two similar companies for a given period of time.