Return on Assets (ROA) Formula (Table of Contents)
Return on Assets (ROA) 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 formula Example
Below is the information given about the Company A and B. Find the ROA of both the company.
- 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
Calculation of Return on assets ratio formula:
ROA formula = Net Income / Average Total Assets
Interpretation of Return on Assets Ratio
- It is always better for the company to have a higher ratio. 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 ratioof 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.
Explanation of ROA Ratio FormulaROA 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 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 Ratio Formula
- Return on assets 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 formula proves to be an apt profitability measure.
- Return on assets 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.
Return on Assets Ratio CalculatorYou can use the following Return on Assets (ROA) Calculator
|Return on Assets Ratio =||
|Company A||Company B|
|= $40,000/$170,000||= $70,000/$195,000|
|=0.2353 or 24%||= 0.3590 or 36%|