The Return on Assets, or ROA, is a measure of how efficiently a company is using its assets to generate income. Joseph Piotroski calculates the ROA by dividing a company's net income by the asset position on the balance sheet at the beginning of the financial period. Elsewhere, Stockopedia calculates ROA as net income divided by average assets (ie. opening asset position + ending asset position / 2).
This takes a company’s net profit and divides it by the total assets that were on the company's balance sheet at the beginning of the financial year. For example, if a company generates profits of £1m and had £5m of assets at the beginning of the year, the the ROA is calculated as 20%.
Assets are ultimately obtained from two potential sources of financing, debt and equity. The ROA looks to measure the performance of the company with respect to all assets, regardless of how they were obtained. A high figure often means that the company has a defensible edge versus its competitors (e.g. a strong brand or a unique product). The metric can be more useful than measures of return against equity if debt constitutes a significant part of a company’s balance sheet.