6.13What is Return on Assets (ROA)?
1What is it?
ROA measures profit compared with everything the company owns (total assets).
2Why does it exist?
It shows how efficiently assets are used, and is especially important for banks, where 1%+ ROA is considered good.
3Diagram
High value means…
Efficient asset use.
Low value means…
Assets aren’t earning much.
Is high or low good?
Higher is better. For banks, 1–2% is strong; for manufacturers, compare with peers.
4Calculation
ROA = Net profit ÷ Total assets × 100
- Net profit = ₹20,000 cr; total assets = ₹10,00,000 cr (a large bank, hypothetical).
- ROA = 2%.
₹2 profit for every ₹100 of assets.
5Risks
- Asset-heavy industries naturally have lower ROA.
- Accounting values of assets vary.
6Practical use
Always compare a ratio with (1) the company’s own history and (2) other companies in the same industry. A single number on its own means little.
7Quick revision
- ROA = profit ÷ assets.
- Key for banks (>1% good).
- Compare within industry.
8Knowledge check
Q1. Profit ₹50 cr, assets ₹2,500 cr. ROA?Show answer
2%.
Q2. Why is ROA small for banks?Show answer
They have huge assets (loans) funded mostly by deposits.
Q3. Is 1.5% ROA good for a bank?Show answer
Yes, generally.