Return on Average Assets (ROAA)

What is Return on Average Assets?

Return on Average Assets (ROAA) is an extension of the ratio Return on Assets and 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 a period of time and is calculated as Net earnings divided by Average total assets (beginning plus ending of assets divided by two).

Here’s the formula –

Return on Average Assets (ROAA)

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

In the above ratio, there are two components.

Example

Let’s take a simple example to calculate the ROAA 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 ending total 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%.

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. To know that, they use the ROAA formula to see how well the company is utilizing its assets.
  • If the ROAA is lower, it is easily understood that the company is the higher asset-intensive company. On the other hand, if the ROAA is higher, the company is a lower asset-intensive.
  • Investors need to look at the industry first 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 performance of the company; and by comparing the ratio with the 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.

Net Income
Average Total Assets
Return on Average Assets Formula
 

Return on Average Assets Formula =
Net Income
=
Average Total Assets
0
= 0
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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.

Return on Average Assets ROAA in Excel

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

Return on Average Assets ROAA Formula Video

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This article has been a guide to Return on Average Assets formula, its uses along with practical examples. Here we also provide you with ROAA Calculator with a downloadable excel template. You may also have a look at these articles below to enhance your financial analysis learnings