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 –
In the above ratio, there are two components.
- The first component is net income. If we can look into the 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. of the company, we would 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 Before Taxes), We Get The Profit 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. (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 financial statement of the company, i.e., balance sheet. In 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. 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.. To find out the average total assets, we need to consider total assets both at the beginning and at the end. And then, we need to add the beginning, total assets, and the ending total assets and then divide the sum by two to get a simple average.
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.
|Return on Average Assets Formula =||
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
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