Home
  /  
Learning Center
  /  
Return on assets (ROA): Definition, formula, and examples

Return on assets (ROA): Definition, formula, and examples

Josh Krissansen
Contributor
Author
Josh Krissansen
Contributor
Get more from BILL
Subscribe to finance insights and thought leadership content delivered straight to your inbox.
By continuing, you agree to BILL's Terms of Service and Privacy Notice.

How efficiently is your company using its assets to generate profit?

It's a question many finance leaders and business owners aren’t sure how to answer, despite the company having invested millions in capital assets.

In this article, we’ll be diving deep into a financial ratio called return on assets (ROA), which helps you calculate exactly that.

Key takeaways

ROA shows how much profit a company makes for every dollar it owns in assets.

You find ROA by dividing net income by total assets and multiplying by 100.

A higher ROA means the business is using its stuff more efficiently to make money.

What is Return on assets (ROA)? 

Return on assets (ROA) is a financial metric that evaluates how effectively a company uses its assets to generate earnings. It’s calculated by dividing net income by total assets. A higher ROA means the company is making more profit for each dollar invested in assets, indicating stronger operational efficiency.

Understanding return on assets

It's a fairly simple formula: you just divide net income by total assets, then multiply by 100 to express the number as a percentage.

ROA shows how much profit a company earns for each dollar of assets it owns. An ROA of 10%, for example, shows that for every dollar of assets the business owns, it makes $0.10 in net income annually.

ROA is a key metric in ratio analysis. It helps investors and business leaders assess how well a company is managing its resources. Higher ROAs indicate a more efficient use of assets to produce earnings, while lower ROAs may suggest inefficiencies or underutilized resources.

Because it ties profitability to asset management, ROA offers valuable insights into operational efficiency. For example, two companies with similar profits but different asset bases might have very different ROAs. This would show and investor which one is running a leaner, more efficient operation.

In the real world, ROA is often used by investors to compare companies within the same industry, where asset structures are more comparable. It’s also used internally by business owners and CFOs to monitor performance over time, guide investment decisions, and identify opportunities to improve asset utilization.

How to calculate Return on assets

Below is the formula for calculating ROA:

Return on Assets Formula 

First, you’ll need to know the simple formula for calculating return on assets:

Return on assets (ROA) formula
ROA = (Net income / Total assets) x 100

As you can see, the ROA formula only requires two inputs:

  • Net income: The profit a company earns after all operational and non-operational expenses, taxes, and interest have been accounted for. It's found at the bottom of the income statement.
  • Total assets: Everything the company owns (both current and non-current assets). Its found on the balance sheet.

Once you’ve divided net income by total assets, you multiply that number to express ROA as a percentage.

Calculating ROA 

Here’s a quick step-by-step guide on how to calculate ROA using the formula discussed above:

  1. Find net income for the period on your income statement 
  2. Find total assets on the balance sheet for the same period
  3. Divide net income by total assets
  4. Multiply the result by 100 to express it as a percentage

Let’s illustrate with an example. Say a company has a net income of $200,000 and total assets of $2,500,000.

Applying the ROA formula:

($200,000 /  $2,500,000) x 100 = 8%

In this case, for every dollar of assets the company has, it generates $0.08 in profit.

Common mistakes to avoid when calculating ROA 

There are a few easy-to-make errors that can easily distort your ROA. Here are the main ones to look out for and avoid:

  • Using gross income instead of net income
  • Not using the average total assets over the period (especially for year-over-year comparisons)
  • Comparing ROA across different industries with vastly different asset requirements
  • Forgetting to convert the final number into a percentage

Interpreting Return on Assets (ROA)

Being able to calculate ROA is a good start, but its even more valuable to know how to interpret and analyze the results.

Automate your financial operations—demo BILL today

What is a good ROA ratio? 

There’s really no one “good ROA” ratio, as it depends a lot on the industry you’re working in.

As a rule of thumb, an ROA above 5% is generally a good start, and anything above 10% is typically seen as strong.

That said, context matters, and asset structures have a huge influence on ROA.

A capital-light tech company might have a high ROA, while a manufacturing firm with heavy equipment and infrastructure could have a lower ROA and still be healthy.

ROA industry benchmarks 

Looking at industry benchmarks is often more helpful than looking for a general “good” ROA ratio.

Here are a few rough averages for common industries:

  • Technology: 10-20%
  • Retail: 5-10%
  • Manufacturing: 3-7%
  • Utilities: 1-5%
  • Financial Services: 1-2%

Note that technology companies tend to have higher ROAs than manufacturing and utilities companies. This is due to differences in capital structures, where tech companies tend to be asset-light while businesses in manufacturing and utilities sectors require heavy capital investments.

Factors influencing ROA 

Common factors that can influence a company’s Return on Assets include:

  • Asset intensity and business model: Businesses that require huge capital investments (like an airline) naturally have lower ROAs, while service-based companies usually need fewer assets than product-based companies, often resulting in higher ROAs.
  • Profit margins: Businesses with high profitability levels have higher ROAs, even if asset levels stay the same.
  • Operational efficiency: Companies that manage inventory, production, or staffing effectively often see higher ROA.
  • Asset age and depreciation: Older assets with low book value can inflate ROA.

Return on assets vs. return on equity (ROE) vs. return on investment (ROI) 

The world of finance is full of acronyms, and some of them are quite similar.

For that reason, ROA often gets confused with ROE (Return on Equity) and ROI (Return on Investment).

These metrics are similar and connected but give us very different information. Here’s a quick overview:

Return on Assets (ROA) Return on Equity (ROE) Return on Investment (ROI)
Purpose Measures how efficiently a company uses all of its assets to generate profit. Focuses on returns generated specifically for shareholders, using only the company’s equity. A broader measure used to evaluate the profitability of a specific investment, project, or campaign.
Formula Net Income / Total Assets Net Income / Shareholder’s Equity (Gain from Investment – Cost of Investment) / Cost of Investment
When to use it To assess overall operational efficiency, regardless of how the company is financed (debt vs. equity). To understand how well a company is delivering value specifically to its shareholders. To evaluate the success of a specific investment or initiative, such as launching a new product or marketing campaign.
Implications for investors Shows how well the company turns resources into profit, which is critical for evaluating management’s effectiveness. Appeals to equity investors who want to see how their capital is being used to generate returns. Helps both internal teams and external investors judge whether a particular opportunity is worth pursuing.

Utilizing ROA for business decisions 

Return on assets isn’t just a metric for investors. It’s also a valuable internal tool for business leaders making strategic decisions.

Here are three ways you can use ROA to guide decision-making.

1. Strategic planning

A declining ROA might signal operational inefficiencies or underperforming assets, prompting a closer look at how resources are allocated.

On the other hand, a rising ROA suggests stronger asset utilization, helping leadership identify what’s working and scale it.

2. Evaluating investment opportunities

When considering major purchases (like new equipment, technology, or expansion), ROA can help assess whether those assets are likely to improve profitability. 

Comparing projected ROA across different opportunities enables smarter, more data-driven capital investment decisions.

3. Financial reporting and budgeting

ROA insights can also be woven into regular financial reporting and budgeting. 

By setting ROA-based targets, businesses can align spending and resource planning with profitability goals. This ensures departments aren’t just hitting revenue or cost benchmarks but also contributing to stronger overall efficiency.

Return on assets is a financial reporting staple 

ROA offers a clear snapshot of how efficiently your business uses its assets to generate profit.

Including ROA in your financial reporting helps tie profitability to resource management, making it easier to spot inefficiencies and guide smarter decisions. 

For a complete toolkit to elevate your reporting, check out our financial reporting package template.

Start using BILL today
Author
Josh Krissansen
Contributor
Josh Krissansen is a freelance writer, who writes content for BILL. He is a small business owner with a background in sales and marketing roles. With over 5 years of writing experience, Josh brings clarity and insight to complex financial and business matters.
Author
Josh Krissansen
Contributor
Josh Krissansen is a freelance writer, who writes content for BILL. He is a small business owner with a background in sales and marketing roles. With over 5 years of writing experience, Josh brings clarity and insight to complex financial and business matters.
Get more from BILL
Subscribe to finance insights and thought leadership content delivered straight to your inbox.
By continuing, you agree to BILL's Terms of Service and Privacy Notice.
BILL and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on, for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. BILL assumes no responsibility for any inaccuracies or inconsistencies in the content. While we have made every attempt to ensure that the information contained in this site has been obtained from reliable sources, BILL is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information in this site is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, express or implied. In no event shall BILL, its affiliates or parent company, or the directors, officers, agents or employees thereof, be liable to you or anyone else for any decision made or action taken in reliance on the information in this site or for any consequential, special or similar damages, even if advised of the possibility of such damages. Certain links in this site connect to other websites maintained by third parties over whom BILL has no control. BILL makes no representations as to the accuracy or any other aspect of information contained in other websites.