A profitability ratio that relates net income to total assets. Return on assets (ROA) is a measure of profit per dollar of assets, i.e., it indicates how well a company is using its assets to produce profits:

For example, if a company has reported $50,000 and $450,000 in net income and total assets respectively, then its return on assets (ROA) is:

ROA= 50,000/ 450,000= 11.11%

This means every dollar of assets contributes 11.11 cents to the company’s profits.

This ratio is inconsistent since it underestimates net income (it accounts for net income available to stockholders). Therefore, a more accurate measure of assets’ profitability would be one that takes into account income used to service debts.

This measure is known as return on total assets (ROTA) or preinterest ROA.