Return on Assets
ROA
Return on assets measures net profit against everything the company owns, regardless of whether it was funded by shareholders or lenders. It is ROE with the leverage removed.
Formula
ROA
ROA (%) = Net Profit ÷ Total Assets × 100
Benchmark: Higher is better; a wide gap between ROE and ROA means the ROE is built on debt
Reading the number
ROE divides profit by equity only. ROA divides it by all assets, which equal equity plus everything borrowed. The two ratios therefore differ by exactly the leverage: ROE equals ROA multiplied by the equity multiplier from the DuPont identity.
That makes ROA the quickest honesty check on a high ROE. If ROE is 28 percent and ROA is 7 percent, the company is running four rupees of assets for every rupee of equity, and most of the return is being manufactured by borrowing. If ROE and ROA are close, the return is genuine.
Indian example
Related ratios
Glossary terms
From the research
How The Valuation Node Approaches Research
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ValuationWhat Three Years of a Cash Flow Statement Reveals That One Year Hides
A single year of cash flow is a snapshot. Three years is a story. Learn what the trend reveals about earnings quality, funding, and sustainability.
ValuationComparing Two Companies on ROE, and Why the Higher One Is Not Always Better
Two companies can report the same ROE for very different reasons. DuPont analysis shows why an ROE built on leverage is not the same as one built on quality.