Return on Total Assets Formula (ROTA)
Return on total assets (ROTA) is one of the profitability indicators that measures how efficiently the firm manages its assets to earn the profits during that period, and its formula is a simple ratio of Operating Profit to Average Assets of the company.
Where,
EBIT will stand for Earnings Before Interest and Tax
Explanation
The return on assets ratio formula will measure how effectively the firm or the organization can earn a return on its investment that is made in assets. In other words, ROTA depicts how efficiently the firm or the company or the organization can convert the amount or the money which is used to purchase those assets into operating profits or operating income.
Since all assets can be funded either by debt or equity, the ratio has to be calculated by adding back interest expense in the above formula. Operating income has to be computed for the numerator. Then one needs to take average assets in the denominator since the firm keeps running a business, an asset keeps changing in the entire year, and hence taking one total asset will result in the perhaps biased figure.
Examples of Return on Total Assets Formula
Let’s see some simple to advanced examples to understand it better.
Example #1
HBK limited has provided you the following details from their financial statements. You are required to do the calculation of ROTA.
Solution
We are given operating income, which is also called as EBIT, which is 1,00,000.
Secondly, we need to calculate average assets, which would total assets during the start of the year and the end of the year and then divide it by 2, which would be 12,50,000.
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Therefore, the calculation of return on total assets (ROTA) can be made as,
ROTA will be –
= 100,000 /12,50,000
ROTA = 8.00%
Example #2
GMP Inc. is one of the hot stock in the market due to its outstanding brand recognition, and investors believe they will outperform the market over the coming years. John is considering investing in the stock. He heard in a seminar that the profitability ratio of GMP Inc. is not up to the mark, and shareholders and debt holders aren’t happy about the same. John decides to do the calculation of Return on total assets to confirm what he learned in the seminar is indeed true? He knows that if the ratio is less than 8%, then the company’s return is indeed poor.
You are required to do the calculation of return on total assets based on the below information and conclude if the company’s profitability ratio (return on total asset) is indeed poor?
The average assets of the company were 101 million.
Solution
We are not given operating income, which we will calculate per below.
Operating Profit
Secondly, we need average assets, which are given as 101 million.
Therefore, the calculation of return on total assets (ROTA) can be made as,
ROTA will be –
=55,05,500 x 100 /10,10,00,000
ROTA will be = 5.45%
Example #3
Common people are limited incorporated as an NGO and as a notforprofit organization. The trustee is of the view that the management is secretly making a profit, and that is not getting revealed in the books of accounts. The management presented the below summary and stated that they are incurring an operating loss.
The Trustee found out that interest expense was unduly stated higher and is not consider while calculating operating profit. Hence, he investigated and found out that interest expenses were 10% of sales.
You are required to do the calculation of return on total assets based on the above figures and assume total assets as 9,79,70,000.
Solution:
To calculate operating profit, interest needs to be avoided in the calculation.
Below is the calculation of operating income (EBIT)
Therefore, the calculation of return on total assets (ROTA) can be made as,
ROTA will be –
=41,29,125.00 /9,79,70,000.00
ROTA =4.21%
Hence, the claim made by management is incorrect, and they are making a profit in an NGO.
Return on Total Assets Calculator
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Operating Profit (EBIT)  
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Return on Total Assets Formula  
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Relevance and Uses
If the ROTA ratio is higher, then it is considered as more favorable to the stakeholders or the investors as it depicts that the firm or the company is more effectively and efficiently managing its assets to earn or produce greater amounts of profit or income. A nonnegative ROTA ratio generally indicates an upward trend of profit as well.
ROTA is widely used when comparing firms or companies which are in the same industry as several industries use assets in nonsimilar fashion or order words differently. For example, construction companies will use expensive equipment, which is large while software firms or the companies shall use servers and computers.
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