Which statement best defines return on assets (ROA)?

• A. Net income divided by total assets
• B. Net income divided by total equity
• C. Gross income divided by total assets
• D. Net income divided by sales

Answer: (A)

Return on assets shows how efficiently a company uses its assets to generate profit. The most meaningful measure uses the bottom-line profit (net income) and the asset base, because ROA tells you how much profit is earned for each dollar of assets employed. Dividing net income by total assets captures that relationship, and many analyses use average assets to smooth the figure over a period, though using ending assets is a common approximation.

This choice aligns with that standard: net income divided by total assets. The other options point to different ideas—dividing net income by equity yields return on equity, which reflects shareholder returns rather than asset efficiency; using gross income ignores expenses and misstates profitability; dividing net income by sales gives profit margin, not how efficiently assets generate profits.