Which statement describes ROAA (return on average assets)?

Which statement describes ROAA (return on average assets)?

• A. It measures profitability relative to the average asset base over a period.
• B. It measures the market value of equity.
• C. It represents the ratio of net income to total liabilities.
• D. It measures cash flow from financing activities.

Answer: (B)

ROAA shows how effectively a credit union turns its assets into earnings. It expresses profitability relative to the average asset base over a period, usually calculated as net income divided by average assets (often computed as the average of beginning and ending assets). Using the average assets smooths out any fluctuations in asset levels during the period, giving a clearer sense of asset utilization and performance. This is different from measuring the market value of equity, or the ratio of net income to liabilities, or cash flow from financing activities. So, ROAA is best described as profitability relative to the average asset base.

ROAA shows how effectively a credit union turns its assets into earnings. It expresses profitability relative to the average asset base over a period, usually calculated as net income divided by average assets (often computed as the average of beginning and ending assets). Using the average assets smooths out any fluctuations in asset levels during the period, giving a clearer sense of asset utilization and performance. This is different from measuring the market value of equity, or the ratio of net income to liabilities, or cash flow from financing activities. So, ROAA is best described as profitability relative to the average asset base.