The Return on Average Assets, or ROA, is a measure of how efficiently a company is using its assets to generate income. It is calculated by dividing a company's annual earnings by its average total assets. This is measured as an average of the past 5 years’ historical values.
This takes a company’s net profit and divides it by the total assets of the company to produce a measure of how efficiently assets are being used by the management team. For example, if a company has profits of £1m and £10m of assets on its balance sheet, the the ROA is calculated as 10%.
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.
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