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ROA Classification of a Capital Expenditure

ROA Classification of a Capital Expenditure thumbnail
Investors use ROA to measure company performance.

Return of assets (ROA) is a profitability ratio used to determine how well a company is managing their resources. ROA measures the percentage of profit generated on the company's total assets and is also referred to as return on investment (ROI).

  1. Definition

    • Capital expenditures are the expenses related to fixed assets after the asset has been placed in operation. Capital expenditures include the expenses that benefit the company's operations for more than one period and is not a recurring expense.

    Capitalization

    • Additions to existing assets such as expansions and extensions are capitalized. Nonrecurring, extraordinary repairs are capitalized. Improvements that increase the future service potential of the asset are capitalized. All expenditures that are capitalized are included in the ROA calculation.

    Calculation

    • ROA is calculated by dividing the net income of the company by its total assets. Net income is the income earned after income and taxes. Total assets include all assets of the company including cash, inventory, and property, plant and equipment (PPE).

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