ROA Confusion

CFA Level I Quant
#1

I don’t understand what the ROA is saying, the definition is: How much net income assets are generating.

I don’t see how this is true, let’s say I run a towing business and my net income for the year was $200,000 and my assets are worth 2,000,000. The ROA in this case is 10%. But how would you tell that the $200,000 came purely from the utilization of these assets! What if $100,000 came from other services like consulting which has nothing to do with the assets themselves.

#2

Even consulting income probably has something to do with the company’s assets: computers, office furniture, whatever. And, in all seriousness, few towing businesses generate much in the way of consulting income.

You’re overanalyzing this. ROA is net income divided by average assets. Know the definition, be able to calculate ROA, and move on.

#3

Thank you sir.

#4

My pleasure.