The definition of ROA is economic profitability or profitability of the assets. It is the acronym for Returns on Assets. What is sought with the concept of ROA is to measure the profitability of the company.
The formula for calculating ROA is very simple. It would be the profits of a company between assets or weighted average assets.
ROA = Earnings / Weighted Average Assets
Where the benefit is the benefit achieved before the financial costs and the tax effect, while the asset can also be the average total asset as well.
For example, when it comes to a business that manufactures parts, the ROA would be the accounting profit obtained in the year divided among all the business assets, such as premises, money, machines or inventories.
Alternatively, the ROA on the sales margin can be obtained, taking into account that:
ROA = Margin on sales x Asset turnover,
Margin over sales = Profit / Sales
Asset turnover = Sales / Average total assets.
Continuing with the example of the parts manufactured by a , there are two variables to calculate the profitability of the business, such as the total sales volume and the margin achieved for each sale. To achieve a 10% profitability in the parts company there will be two ways to achieve this. On the one hand, marketing ten products with a profit of 1% or selling a piece with a profit of 10%. With either of the two options the same profit will be obtained.
You have to differentiate the ROA with the ROE. If the company does not have debt, both parameters will match. For its part, with debt, the ROE will be higher as a result of the leverage effect of the debt, since not so much fixed assets are required to develop the business activity properly.