The ROA formula looks at the ability of a company to utilize its assets to gain a net profit.
It is calculated by dividing a company's Net Income by its Average Total Assets. It can also be calculated by multiplying Net Profit Margin by Asset Turnover (since revenues cancel out).
ROA gives an idea as to how efficient management is at using its assets to generate earnings. The return on assets figure is also a good way to gauge the asset intensity of a business. As a general rule, anything below 5% is very asset-heavy (manufacturing, railroads), anything above 20% is asset-light (advertising firms, software companies).
It is the most stringest test to shareholders as it measures a company?s earnings in relation to all of the resources it had at its disposal (the shareholders? capital plus short and long-term borrowed funds). If a company has no debt, the return on assets and return on equity figures will be the same.
Return on assets is less useful for comparisons between industries because of factors of scale and peculiar capital requirements (such as reserve requirements in the insurance and banking industries).