Return on Assets

Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. ROA IS sometimes this is referred to as "return on investment" - ROI.

ROA indicates what revenues were generated from invested capital (assets). The assets of the company are comprised of both debt and equity. Both of these types of financing are used to fund the operations of the bank. The ROA figure gives an idea of how effectively the bank is converting the money it has to invest into net income.

The higher the ROA number, the better, because the bank is earning more money on less investment. For example, if one bank has a net income of $1 million and total assets of $5 million, its ROA is 20%; however, if another bank earns the same amount but has total assets of $10 million, it has an ROA of 10%. Based on this example, the first bank is better at converting its investment into profit.