science

Return on assets

Return on assets is a science topic covered in the lgStudy science library. This page brings together a partial reference excerpt, illustrations, worked examples, real-world applications and a short study plan, so you can understand Return on assets rather than just read about it. In short: The return on assets (ROA) shows the percentage of how profitable a company's assets are in generating revenue. ROA can be computed as below: R O A = Net Income Average Total Assets {\displaystyle \mathrm {ROA} ={\frac {\mbox{Net Income}}{\mbox{Average Total Assets}}}} The phrase return on average assets (ROAA) is also used, to emphasize that average assets are used in the above formula.

Key takeaways

Return on assets belongs to science; place it in that map before memorising details.
Learn the definition first, then one example that makes the definition concrete.
Connect Return on assets to a quantity you can measure, compute or draw — that is where exam questions come from.
Reproduce the core statement of Return on assets from memory before moving on to harder problems.

Reference excerpt

The return on assets (ROA) shows the percentage of how profitable a company's assets are in generating revenue. ROA can be computed as below:

R O A = Net Income Average Total Assets {\displaystyle \mathrm {ROA} ={\frac {\mbox{Net Income}}{\mbox{Average Total Assets}}}}

The phrase return on average assets (ROAA) is also used, to emphasize that average assets are used in the above formula. This number tells you what the company can do with what it has, i.e. how many dollars of earnings they derive from each dollar of assets they control. It's a useful number for comparing competing companies in the same industry. The number will vary widely across different industries. Return on assets gives an indication of the capital intensity of the company, which will depend on the industry; companies that require large initial investments will generally have lower return on assets. ROAs over 5% are generally considered good.

Usage Return on assets is one of the elements used in financial analysis using the Du Pont Identity.

See also Return on equity (ROE) List of business and finance abbreviations Rate of return on a portfolio Return on brand (ROB) Return on capital (ROC) Return on investment (ROI) Weighted average return on assets (WARA)

References

External links Return On Assets - ROA

Worked examples

Example 1 — a first encounter with Return on assets

Start with the simplest possible case. Write down what Return on assets claims or describes in one sentence, then invent the smallest concrete situation in which that sentence is true. In science, the smallest case is usually a single object, a single equation or a single measurement. Check that every symbol or term in your sentence has a meaning in that case.

Example 2 — changing one variable

Take the situation from Example 1 and change exactly one quantity: double it, halve it, or set it to zero. Predict what should happen to Return on assets before you calculate. Comparing your prediction with the result is the fastest way to find out whether you understand the idea or only the words.

Example 3 — an exam-style question

Typical questions about Return on assets ask you to (a) state it precisely, (b) apply it to given data, and (c) explain a limitation. Practise writing all three answers in under five minutes; the third part is what separates a full-mark answer from an average one.

Applications of Return on assets

In research: Return on assets appears in science research whenever the underlying quantities have to be modelled precisely. Papers usually cite it as a starting assumption and then explore where it breaks down.
In technology and industry: Engineering practice reuses Return on assets in design rules, simulations and safety margins. Knowing the idea lets you read a specification sheet and understand why the numbers look the way they do.
In the classroom: Return on assets is common in secondary-school and first-year university syllabi. It links to neighbouring topics Financial ratios, Investment indicators, so understanding it makes those chapters shorter.
In everyday life: Look for Return on assets outside the textbook — in sport, cooking, traffic, electronics or the sky above you. An example you found yourself is remembered far longer than one you were given.

Ask Teacher Smith questions about this articleOpens your AI tutor with a question about “Return on assets” →

Affiliate

Preply — study more efficiently by working with a personal tutor. 50% off.

How to study Return on assets in 20 minutes

Read the reference excerpt below once, without taking notes.
Close the page and write down what Return on assets means in your own words.
Compare your version with the excerpt and mark what you missed.
Work through the three examples above with pen and paper.
Explain Return on assets out loud to somebody else — or to Teacher Smith in the lgStudy chat.

Frequently asked questions

What is Return on assets in simple terms?

The return on assets (ROA) shows the percentage of how profitable a company's assets are in generating revenue. ROA can be computed as below: R O A = Net Income Average Total Assets {\displaystyle \mathrm {ROA} ={\frac {\mbox{Net Income}}{\mbox{Average Total Assets}}}} The phrase return on average…

Why does Return on assets matter?

Because it connects several science ideas at once: it gives you a definition you can apply, a quantity you can calculate, and a way to check whether a result is plausible.

How should I study Return on assets?

Read the excerpt, restate it from memory, then work through the examples and applications listed on this page. The five-step study plan above takes about twenty minutes.

What does this page cover?

It gives you a compact reference excerpt plus original lgStudy explanations, examples, applications and study material on Return on assets.