Return on Total Assets Formula

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.

Return on Total Assets Formula = Operating Profit (EBIT) /Average Total Assets
Return-on-Total-Assets-Formula

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For eg:
Source: Return on Total Assets Formula (wallstreetmojo.com)

Where,

EBIT will stand for Earnings Before Interest and Tax

Explanation

The return on assets ratioReturn On Assets RatioReturn on assets (ROA) is the ratio between net income, representing the amount of financial and operational income a company has, and total average assets. The arithmetic average of total assets a company holds analyses how much returns a company is producing on the total investment made.read more 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.

You can download this Return on Total Assets Formula Excel Template here – Return on Total Assets Formula Excel Template

Example #1

HBK limited has provided you the following details from their financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more. You are required to do the calculation of ROTA.

  • Operating Income (EBIT): 100000.00
  • Total assets during start of year: 1000000.00
  • Total assets during end of year: 1500000.00

Solution

We are given operating income, which is also called as EBITEBITEarnings before interest and tax (EBIT) refers to the company's operating profit that is acquired after deducting all the expenses except the interest and tax expenses from the revenue. It denotes the organization's profit from business operations while excluding all taxes and costs of capital.read more, 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.

Return on Average Assets formula example 1.1png

Therefore, the calculation of return on total assets (ROTA) can be made as,

Return on Average Assets formula example 1.2png

ROTA will be –

Return on Average Assets formula example 1.3png

=  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 ratioProfitability RatioProfitability ratios help in evaluating the ability of a company to generate income against the expenses. These ratios represent the financial viability of the company in various terms.read more (return on total asset) is indeed poor?

  • Sales: 50050000
  • Cost of goods sold: 37537500
  • Selling Expenses: 202000
  • Administrative Expenses: 1001000
  • Depreciation: 4004000
  • Income Tax: 2502500
  • Total Expenses: 44544500
  • Total Average Assets: 101000000

The average assets of the company were 101 million.

Solution

We are not given operating income, which we will calculate per below.

Operating Profit

Return on Average Assets formula example 2.1png

Secondly, we need average assets, which are given as 101 million.

Therefore, the calculation of return on total assets (ROTA) can be made as,

Return on Average Assets formula example 2.2png

ROTA will be –

Return on Average Assets formula example 2.3png

=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 not-for-profit organizationNot-for-profit OrganizationA not-for-profit organization refers to a legal entity that isn't created to generate profits or revenue for its owners but aims at social, educational, religious or public welfare and service. Such an organization is tax-exempted and run through donations or any other income it makes.read more. 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.

  • Sales: 37537500
  • Cost of goods sold: 28153125
  • Selling Expenses: 1501500
  • Administrative Expenses: 750750
  • Depreciation: 3003000
  • Interest: 4504500
  • Total Expenses: 33408375

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)

example 3.1png

Therefore, the calculation of return on total assets (ROTA) can be made as,

example 3.2png

ROTA will be –

example 3.3png

=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

You can use this calculator

Operating Profit (EBIT)
Average Total Assets
Return on Total Assets Formula
 

Return on Total Assets Formula =
Operating Profit (EBIT)
=
Average Total Assets
0
= 0
0

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 non-negative 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 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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