Which ratio indicates how efficiently a firm uses its assets to generate earnings?

• A. Return on assets (ROA)
• B. Return on equity (ROE)
• C. Earnings per share (EPS)
• D. Price to earnings (P/E)

Answer: (A)

The key idea here is asset-use efficiency: how well a company turns its assets into earnings. Return on assets expresses this directly by comparing net income to the asset base (often using average total assets). A higher ROA means the firm is generating more profit per dollar of assets, indicating efficient use of resources, regardless of how the company is financed or how its stock is valued.

The other options don’t measure asset efficiency in the same way. Return on equity looks at profitability relative to shareholders’ equity, which reflects financing and leverage rather than asset performance. Earnings per share is a per-share profitability metric, not tied to how assets generate earnings. Price to earnings is a market valuation ratio, linking stock price to earnings rather than evaluating asset efficiency.