Return on Average Assets (ROAA)

What is Return on Average Assets?

Return on Average Assets (ROAA) extends the ratio of Return on Assets. Instead of the total assets at the end of the period, it takes an average of the opening and the closing balance of assets for some time. It is calculated as Net earnings divided by Average total assets (beginning plus ending of assets divided by two).

Here’s the formula –

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For eg:
Source: Return on Average Assets (ROAA) (wallstreetmojo.com)

In the above ratio, there are two components.

• The first component is net income. If we can look into the company’s income statementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more we will be able to find the net income. Net income is the last item in the income statement. When we deduct the taxes from PBT (profit before taxes), we get the Profit after TaxProfit After TaxProfit After Tax is the revenue left after deducting the business expenses and tax liabilities. This profit is reflected in the Profit & Loss statement of the business.read more (PAT) or net income.
• The second component in the ratio is the average total assets. To find out assets, we need to look into another company’s financial statement, i.e., the balance sheet. We will find both the current assetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more and non-current assetsNon-current AssetsNon-current assets are long-term assets bought to use in the business, and their benefits are likely to accrue for many years. These Assets reveal information about the company's investing activities and can be tangible or intangible. Examples include property, plant, equipment, land & building, bonds and stocks, patents, trademark.read morein the balance sheet. To find out the average total assets, we need to consider total assets at the beginning and end. And then, we need to add the beginning, total assets, and the total ending assets and then divide the sum by two to get a simple average.

Example

Let’s take a simple example to calculate the ROA formula.

Eye Lash Co. has the following information –

• Net Income – $150,000
• The beginning total assets – $500,000
• The ending total assets – $400,000

Find out the ROAA.

First, we will add up the beginning and the total ending assets. And then take a simple average.

• The average total assets = ($500,000 + $400,000) / 2 = $450,000.

Using the formula, we get –

• ROAA = Net Income / Average Total Assets
• Or, = $150,000 / $450,000 = 1/3 = 33.33%.

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Return on Average Assets Video Explanation

Use of ROAA Formula

Let’s understand the application of the ROAA formula from two points of view.

• For investors, it is important to know whether the company is financially strong or not. They use the ROA formula to see how well the company is utilizing its assets.
• If the ROA is lower, it is easily understood that the company is a higher asset-intensive company. On the other hand, if the ROAA is taller, the company is lower asset-intensive.
• Investors need to look at the industry before interpreting the ratio; because a higher asset-intensive industry will always result in lower ROAA for the company and vice versa.
• For the management, this ratio is also important because the ratio can talk a lot about the company’s performance; and by comparing the ratio with similar companies under the same industry, management would be able to understand how well the company is doing.

Return on Average Assets Calculator

You can use the following calculator.

Return on Average Assets 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 Assets.

You can easily calculate the ratio in the template provided.

You can download this template here – Return on Average Assets  Excel Template.

Return on Average Assets ROAA Formula Video

Frequently Asked Questions (FAQs)

Recommended Articles

This article has been a guide to the return on average assets formula, its uses, and practical examples. We also provide you with an ROAA calculator with a downloadable excel template. You may also look at these articles below to enhance your financial analysis learnings.

• Average Formula in Excel
• Average FormulaAverage FormulaAverage is the value that is used to represent the set of values of data as is the average calculated from whole data and this formula is calculated by adding all the values of the set given, denoted by summation of X and dividing it by the number of values given in set denoted by N.read more
• Current Assets CalculationCurrent Assets CalculationThe formula for current assets is derived by adding all of the assets on the balance sheet that can be converted to cash in less than a year. Cash, cash equivalents, account receivables, inventories, marketable securities, prepaid expenses, and other current assets are the most common.read more
• Average Total Cost FormulaAverage Total Cost FormulaThe cost per unit of the quantity produced is calculated using the average total cost formula. It is calculated by dividing the total manufacturing cost by the total number of units produced.read more