In Finance MCQs, Return on Assets (ROA) is a highly important profitability ratio that measures how efficiently a company uses its total assets to generate net income. The correct answer is 0.0714 (or 7.14%), calculated using the standard ROA formula.... Read More
In Finance MCQs, Return on Assets (ROA) is a highly important profitability ratio that measures how efficiently a company uses its total assets to generate net income. The correct answer is 0.0714 (or 7.14%), calculated using the standard ROA formula. This ratio plays a significant role in financial statement analysis because it helps investors, analysts, business managers, and finance students evaluate overall asset efficiency and operational performance.
The formula used to calculate Return on Assets is:
ROA = Net Income ÷ Total Assets
In this question, the company’s net income is 150, and total assets are 2,100. Substituting these values into the formula:
ROA = 150 ÷ 2,100
ROA ≈ 0.0714
To express ROA as a percentage, multiply by 100:
0.0714 × 100 = 7.14%
This means the company generates approximately 7.14 cents of profit for every $1 invested in total assets. In other words, for every dollar of resources the company controls — including cash, equipment, inventory, and receivables — it earns about 7.14% in net income.
Understanding the meaning behind ROA is essential for finance exams and real-world analysis. A higher ROA indicates that management is using assets efficiently to produce profits. It reflects strong operational performance, effective cost control, and smart asset utilization. On the other hand, a lower ROA may signal inefficiencies such as underutilized equipment, excessive asset investment, poor pricing strategy, or declining profit margins.
ROA is particularly useful because it evaluates total asset performance regardless of how those assets are financed. This is what makes it different from Return on Equity (ROE). While ROA focuses on total assets, ROE measures profitability relative to shareholders’ equity only. ROE can be significantly affected by financial leverage (debt). If a company borrows heavily, it can increase ROE even if operational efficiency does not improve. However, ROA remains neutral because it considers total assets, whether financed by debt or equity.
This distinction is extremely important in financial analysis. Investors often use ROA to compare companies across the same industry because it provides a clearer picture of operational efficiency. For example, two firms may have similar net income, but if one uses fewer assets to generate that income, it will have a higher ROA and therefore stronger asset efficiency.
It is also important to understand why the other options in the MCQ are incorrect. Options such as 0.0007, 0.05 times, or 7.15 times do not correctly apply the ROA formula. A common mistake students make is misplacing the decimal point or confusing percentage form with times form. ROA is expressed either as a decimal (0.0714) or as a percentage (7.14%), not as “times” unless specifically stated in turnover ratio format. Careful calculation and understanding of ratio interpretation are essential for scoring well in accounting and finance examinations.
From an SEO and academic perspective, key terms such as “Return on Assets calculation,” “ROA formula,” “net income divided by total assets,” “asset efficiency ratio,” and “profitability ratio analysis” are critical for learners searching online. Many students preparing for finance tests, MBA exams, accounting quizzes, or professional certifications frequently look up these terms.
In conclusion, the correct Return on Total Assets based on the given data is 0.0714 or 7.14%, making option B the correct answer. This ratio provides valuable insight into how effectively a company converts its assets into profit. Mastering ROA calculations not only helps in exams but also builds a strong foundation for financial statement analysis, investment decision-making, and corporate performance evaluation.
Discussion
Leave a Comment