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Return on assets

Net income divided by total assets; how much profit the asset base produces regardless of how it was funded.

ROA is leverage-neutral on the denominator but not on the numerator, because net-income is after interest-expense. A stricter version uses after-tax operating-income instead, which is effectively return-on-invested-capital measured against all assets.

Its main use is spotting asset-heavy businesses that earn thin returns. Banks run ROA near 1% and find that acceptable only because leverage multiplies it into a double-digit return-on-equity.

Example: Northwind Tools earns $78M on $1,480M of assets, a 5.3% ROA. Meridian Savings Bank earns $84M on $9.2B of assets, 0.9%, which is healthy for a bank.

Related: return-on-equity, return-on-invested-capital, dupont-analysis, assets, net-interest-margin

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Margin and leverageA small deposit controlling a much larger position, and the point at which losses trigger a margin call.Position you controlnotional value $100,000your margin deposit: $5,000$100,000 / $5,000 = 20:1 leverageYour deposit absorbs every dollar of loss$5,000$2,500$0Equity leftMARGIN CALLequity has fallen to $2,5000%1%2%2.5%3%4%5%How far the price moves against you
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.

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