Return on Assets

Return on Assets (ROA) is a profitability measure that is calculated by dividing net income by average total assets. This metric is important for both operators and investors. Learn the ROA definition, formula, and limitations through our examples.

What is Return on Assets?

Return on Assets (ROA) is a profitability metric that shows how efficient a company is with its assets. The ROA formula is net income divided by average total assets.

Return on Assets = Net Income / Average Total Assets

Business owners, operators, and investors will look to ROA as a measure of the company’s financial health and profitability. Companies want a higher ROA value, which means they are making better use of their assets.

There are two ways of improving return on assets, by increasing profitability and by decreasing assets. This is an important financial ratio to monitor when tracking a company’s profitability.
Related profitability metrics include profit margin, asset turnover ratio, and return on equity.

Return on Assets Definition

Return on asset is net income divided by total assets.

Net income is the bottom line on a company’s income statement.
It’s calculated by taking total revenue and subtracting cost of goods sold, operating expenses, interest payments, taxes, amortization, and depreciation. This term is also referred to as net profit and net earnings.
Total assets is the sum of current assets and noncurrent assets on a company’s balance sheet.

Asset balances change daily due to the purchase of equipment, the sale of equipment, inventory changes, and seasonal sales fluctuations. That’s why we must calculate average assets over the accounting period.

Remember that the time period for the numerator and denominator must match. For example, to calculate ROA for the fiscal year 2021, you would use annual net income and the average assets across the year.

ROA is also related to a company’s profit margin multiplied by its asset turnover. As you can imagine, the ROA formula takes into account profitability (via the numerator) and asset utilization (via the denominator).

We will explore the return on assets calculation further in the next section.

Calculate Return on Assets

To calculate return on assets, you will need to know the net income and the average total assets for the accounting period. If you are given these two values, you can use the simplest form of the formula:

ROA = Net Income / Average Total Assets

If you are given starting and ending assets, then you will need to calculate the average first then enter that value as the denominator.

If you are given an income statement without the bottom line, then you will need to calculate net income first. As a reminder, this value may also be called net profit or net earnings.

ROA is always displayed as a percentage. Companies that operate with a net loss would have a negative ROA. All things considered, a business would want a higher ROA.

In this next section, we will walk through several return on assets examples.

Return on Assets Examples

Now let’s calculate return on asset using the example of Company A over two years, 2021 and 2022.

Company A, FY2021

  • Total Revenue: $1,200,000
  • Net Income: $230,000
  • Starting Total Assets: $600,000
  • Ending Total Assets: $580,000

Company A, FY2022

  • Total Revenue: $1,500,000
  • Net Income: $250,000
  • Average Assets: $800,000

Here is the math for 2021:

Average Assets = (Starting Assets + Ending Assets) / 2

Average Assets = ($600,000 + $580,000) / 2

Average Assets = $590,000

ROA = Net Income / Average Assets

ROA = $230,000 / $590,000

ROA = 38.98%

Since we are given the average for 2022, we can skip that step. And here is the math for 2022:

ROA = Net Income / Average Assets

ROA = $250,000 / $800,000

ROA = 31.25%

As you can see, Company A grew revenue by 25% and profit by 9% in 2022. That said, ROA decreased from 2021 to 2022 because assets grew faster than profit.

Other Income Ratios

In addition to calculating return on assets, there are other income ratios that help people understand the financial health of a business.

Examples include:

  • Profit margin
  • Asset turnover
  • Return on equity

Profit Margin

Profit margin is the amount of profit a business generates relative to its revenue. Like other margins, profit margin is expressed as a percentage.

Profit margin generally refers to net profit margin. Here is the net profit margin formula:

Net Profit Margin = Net Profit / Revenue

That said, you could also generate a profit margin from gross profit or operating profit.

Asset Turnover Ratio

Asset turnover ratio, also called total asset turnover, is the ratio of revenue to assets. It’s expressed as how many times revenue is greater than assets.

The asset turnover ratio formula is:

Asset Turnover Ratio = Revenue / Average Total Assets

Companies will want a higher asset turnover ratio because that shows they are using their assets efficiently.

Return on Equity (ROE)

Return on equity (ROE) is a profitability ratio that compares a company’s profitability to total shareholders’ equity. Shareholders’ equity is found on a company’s balance sheet.

This is a measure of efficiency, as it is better for a business to generate more profit with less equity investment.

The return on equity formula is:

ROE = Net Profit / Average Shareholders’ Equity

ROE is expressed as a percent. The higher the number, the more efficient the company is at generating profit.

Final Thoughts

Return on assets is a profitability metric that compares a company’s profit to its assets. The accounting ratio is used by operators to ensure the business is efficient and by investors to compare companies to competitors in the same industry.
Net income refers to total revenue minus total expenses. It’s listed on the bottom of the income statement. It includes additional income that is not generated from core business operations, which can be significant in some periods.
Interest expenses, taxes, depreciation, and amortization are also factored into net income. That’s why some variations of this formula use EBITDA, which provides a clearer view of business profitability.

A business can improve its net income by increasing revenue, decreasing expenses, decreasing interest payments, decreasing taxes, decreasing depreciation, and decreasing amortization.

A company’s total assets refers to the sum of current assets and noncurrent assets, including fixed assets, intangible assets, and long-term investments. This is helpful, but there are also variations of ROA that are used to more accurately portray the business.

Companies with high intangible asset balances may not find the return on total assets to be a useful metric. Instead, analysts might choose to look at return on fixed assets.

Furthermore, return on assets cannot be used to compare companies across industries. Some industries are asset light, others are asset heavy, some have high fixed assets, others have high intangible assets.

For instance, a software company, a hardware company that uses an outsourced manufacturer, and an energy company would have vastly different asset bases. Using ROA would not be appropriate to compare their financial health, risk, or profitability.

Lastly, the ROA ratio looks at a company’s asset total (which can be funded by debt or equity) to net income. As a general rule, debtholders would be paid back by interest expense and stockholders would make their returns through profit.
Using net income as a gauge against both debt and equity expenditures might not provide an adequate amount of details. Analysts and investors may want to pair ROA with either the debt to equity or debt to asset ratio.

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