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All trading basics

Return On Assets - ROA

Return on assets = Net Income + Interest Expense ÷ Total Assets

Indicates what return a company is generating on the firm's investments/assets.

Things to remember

  • The ROA is often referred to as ROI ("Return on Investment")
  • Interest expense is added to ignore the costs associated with funding those assets.
Balance Sheet
Consolidated balance sheet and consolidated income statement for Cory’s Tequila Co. for 1998 and 1999
Income Statement
Consolidated income statement for Cory’s Tequila Co. for 1998 and 1999

For Cory's Tequila Co.: $2,096 ÷ $14,725 = 0.14

Return on Assets Analysis:

This is an important ratio for companies deciding whether or not to initiate a new project. The basis of this ratio is that if a company is going to start a project they expect to earn a return on it. This return is the ROA. Simply put, if ROA is above the rate at which the company borrows funds then the project should be accepted; if not then it is rejected. Cory's Tequila Co.'s ROA is 14% - very high, this is over double their cost of borrowing.