Return on Average Assets ROAA Formula (Table of Contents)
Return on Average Assets Formula
Return on average assets formula helps to find out how a company is utilizing its assets. For an investor, every profitability ratio is important. Only net profit margin and gross profit margin won’t help; the investor also needs to know how well the assets are being utilized to generate profits.
ROAA formula finds out just that – a profitability ratio that tells us how well a company uses its assets to fuel its profits.
Here’s the return on average assets formula –
Example of ROAA Formula
Let’s take a simple example to calculate 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 return on average assets formula, we get –
- ROAA = Net Income / Average Total Assets
- Or, = $150,000 / $450,000 = 1/3 = 33.33%.
Explanation of Return on Average Assets Formula
In the above ratio, there are two components.
- The first component is the net income. If we can look into the income statement 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 Tax (PAT) or net income.
- The second component in the ratio is 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 assets and non-current assets. 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.
Use of ROAA Formula
Let’s understand the application of ROAA formula from two points of views.
- For the investors, it is important to know whether the company is financially strong or not. To know that, they use 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 higher asset-intensive company. On the other hand, if the ROAA is higher, the company is lower asset intensive.
- The 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 Return on Average Assets Formula Calculator.
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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.
You can download this return on average assets template here – Return on Average Assets Excel Template
Recommended Article –
This 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 downloadable excel template. You may also have a look at these articles below to enhance your financial analysis learnings
- Return on Average Equity Formula
- Weighted Average Formula
- Return on Assets (ROA) Formula
- Dividends per Share Formula
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