Certified Financial Management Specialist Practice Exam

What does Return on Assets (ROA) measure?

1. Revenue relative to total assets

2. Net income relative to total assets

3. Equity relative to total revenue

4. Gross profit relative to net income

The correct answer is: Net income relative to total assets

Return on Assets (ROA) is a financial metric that measures how efficiently a company uses its assets to generate profit. Specifically, it calculates the net income as a percentage of total assets. This ratio provides insight into how well a company is performing in terms of its asset management; a higher ROA indicates that the company is effectively utilizing its assets to generate earnings. By focusing on net income relative to total assets, ROA highlights the relationship between the company's profitability and the resources it has at its disposal. This is important for investors and stakeholders who want to understand how effectively their capital is being employed. The other choices do not capture the essence of ROA as they either measure different relationships (like revenue or equity) or combine metrics in a way that is unrelated to asset efficiency. Therefore, the correct answer highlights the financial performance relative to asset use, providing a clear and meaningful evaluation of operational effectiveness.