Financial Statement Analysis
- Ratio Analysis of Financial Statements (Formula, Types, Excel)
- Ratio Analysis
- Liquidity Ratios
- Turnover Ratios
- Profitability Ratios
- Profit Margin
- Gross Profit Margin Formula
- Operating Profit Margin Formula
- Net Profit Margin Formula
- EBIDTA Margin
- Earnings Per Share
- Basic EPS
- Diluted EPS
- Basic EPS vs Diluted EPS
- Return on Equity (ROE)
- Return on Capital Employed (ROCE)
- Return on Invested Capital (ROIC)
- Return on Total Assets (ROA)
- Return on Average Capital Employed
- Capital employed Employed
- Return on Average Assets (ROAA)
- Return on Average Equity (ROAE)
- Return on Assets Formula
- Return on Equity Formula
- DuPont Formula
- Net Interest Margin Formula
- Earnings Per Share Formula
- Diluted EPS Formula
- Contribution Margin Formula
- Revenue Per Employee Ratio
- Operating Leverage
- EBIT vs EBITDA
- Capital Gains Yield
- Tax Equivalent Yield
- LTM Revenue
- Operating Expense Ratio Formula
- Overhead Ratio Formula
- Capacity Utilization Rate Formula
- Total Expense Ratio Formula
- Efficiency Ratios
- Dividend Ratios
- Debt Ratios
- Debt to Equity Ratio
- Debt Coverage Ratio
- Debt Ratio
- Debt to Income Ratio Formula (DTI)
- Capital Gearing Ratio
- Capitalization Ratio
- Interest Coverage Ratio
- Times Interest Earned Ratio
- Debt Service Coverage Ratio (DSCR)
- Financial Leverage Ratio
- Net Debt Formula
- Leverage Ratios
- Operating Leverage vs Financial Leverage
- Current Yield
- Debt Yield Ratio
Return on Assets Ratio Formula
ROA ratio is a measure of profitability for the company.
ROA shows the profitability of the company in relation to its Average Total Assets.
Here’s the return on assets ratio formula:
Return on Assets Ratio Example
- Net Income = $40,000
- Opening Assets = $150,000
- Closing Assets = $190,000
- Average Total Assets = (Opening + Closing)/2 = (150,000 + 190,000)/2 = $170,000
- Net Income = $70,000
- Opening Assets = $280,000
- Closing Assets = $110,000
- Average Total Assets = (Opening + Closing)/2 = (280,000 + 110,000)/2 = $195,000
Explanation of Return on Assets Ratio Formula:
- ROA Formula shows the profit earned as a percentage from its Average Total Assets for the period by a company.
- It shows that how efficiently the company can convert its investment in Assets into profits.
- For better results, some analysts add back the cost of acquiring capital (interest expense) to Net profits while calculating the ratio.
- While measuring profitability ROA Formula takes into account the assets financed by equity holders as well as debt holders, hence, interest expense is added back to the Net Income.
- Due to the various operations of the company, assets may vary over the period of time, which is why average of the total assets are considered.
- It is given by (Opening Assets + Closing Assets)/2. It helps in missing out on major changes in asset positions happening in the whole year.
Use of ROA Formula
- Return on assets ratio formula gives the investors and creditors an overview of the top management’s efficiency to bring out earnings from the company’s assets.
- Whenever comparison of companies with similar capitalization is to be done, Return on assets ratio formula proves to be an apt profitability measure.
- Return on assets ratio formula showcases the profit-generating strength of the assets that are employed by the company.
- It is internally used by the managers to track the asset use over a period of time, to monitor the performance of the company in regards to industry performance.
Interpretation of Return on Assets Ratio
- It is always better for the company to have a higher ROA. The higher the better.
- It shows that the management is efficient and capable of generating more and more profits from the available assets.
- In the above example Company B is comparatively better as it has a higher ROA of 36% as compared to that of Company A which has a ROA of 24%.
- It means that every dollar that company B invests in debt or equity it is able to return 36 cents as profits per year.
- If this percentage (36%) has a y-o-y increasing trend then it can be said that the company is managing its assets efficiently.
(Return on Assets Ratio) ROA Calculator
You can use the following ROA Calculator.
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Return on Assets Ratio in Excel (with Excel Template)
Let us now do the same example above in Excel. This is very simple. You need to provide the two inputs of Net Income and Average Total Sales. You can easily calculate the ratio in the template provided.
You can download this Return on Assets template here – Return on Assets (ROA) Excel Template
This has been a guide to Return on Assets Formula, practical examples, and ROA calculator along with excel templates. You may also have a look at these articles below to learn more about Financial Analysis –