Return on Assets ROA Return on Capital ROC

The return on assets (ROA) of a firm measures its operating efficiency in generating profits from its assets, prior to the effects of financing.

Total Assets

Earnings before interest and taxes (EBIT) is the accounting measure of operating income from the income statement and total assets refers to the assets as measured using accounting rules, i.e., using book value for most assets. Alternatively, return on assets can be written as:

rOa Net Income + Interest Expenses (1 - tax rate)

Total Assets

By separating the financing effects from the operating effects, the return on assets provides a cleaner measure of the true return on these assets.

ROA can also be computed on a pre-tax basis with no loss of generality, by using the earnings before interest and taxes (EBIT), and not adjusting for taxes -

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