Return on Assets (ROA) is a crucial financial metric that measures how efficiently a company turns its assets into profit. For Indian investors—whether you're comparing stocks, evaluating an insurance company, or simply understanding how businesses operate—ROA can offer valuable insights into a company's real earning power.
But how does this ratio work, and what’s considered a "good" ROA in the Indian context? Let’s break it down.
What is the Return on Assets (ROA)
ROA shows how much profit a company makes for every rupee invested in its assets. It’s expressed as a percentage and gives you a direct line of sight into operational efficiency.
Formula:
ROA = (Net Income) / (Average Total Assets)
If a company has an ROA of 10%, it means it earns Rs. 0.10 in profit for every Rs. 1 of assets. The higher the ROA, the better the company is at extracting value from what it owns.
In India, where asset structures vary across sectors, ROA helps compare businesses on a level playing field. For instance, IT firms, which are asset-light, often show higher ROAs compared to manufacturing or utility companies, which require heavy infrastructure.
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