What does the Return on Assets measure?

Return on Assets (ROA) is a financial metric that assesses how efficiently a company uses its assets to generate profit. It is calculated by taking net income and dividing it by average total assets. This ratio provides insight into how well management is utilizing the company's assets to produce earnings.

When net income is divided by average total assets, the resulting figure represents the percentage of profit a company earns for each dollar of assets it controls. A higher ROA indicates that the company is more effective at converting its investments in assets into actual profit.

The other options do not accurately represent this measure. For instance, net income divided by gross profit does not consider the total asset base and thus fails to measure asset efficiency. Average total assets divided by net income would yield a ratio that indicates the amount of assets needed to generate a unit of profit, but it does not reflect profitability itself. Lastly, earnings per share divided by dividends deals more with shareholder returns rather than asset performance, making it unrelated to the concept of ROA.