Formula to Calculate Return on Assets
Return on Assets ratio is a measure of profitability for the company and its formula calculates the profitability of the company in relation to its Average Total Assets.
Mathematically, it is represented as below –
- 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 the 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.
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
- 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 the 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 an 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.
You can use the following ROA Calculator.
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Calculate Return on Assets Ratio in Excel
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.
This has been a guide to Return on Assets Formula. Here we discuss how to calculate ROA along with practical examples, its uses, and interpretations. You may also have a look at these articles below to learn more about Financial Analysis –