Return on Assets Formula
Return on Assets (ROA) =
Net Income / Average Total Assets
Average Total Assets = (Beginning total Assets + Ending total Assets)/2
What is Return on Assets?
Investors and companies evaluate Return on Assets (ROA) to measure performance, if the company is making a profit with respect to their assets; how a company uses its assets to turn a profit. A key consideration when evaluating a companys ROA is the industry it is in and the required assets necessary to produce their product. In short, it is a profitability ratio to measure the performance of a company.
**Note** The Net Income comes from the Income Statement, and Total Assets are found on the Balance Sheet (review the beginning Total Assets and the period ending Total Assets). It is important to mention that a good or bad ROA varies by industry, so it is important to evaluate similar companies in similar industry's to know whether or not the Return on Assets is "good" or "bad." Once this evaluation is completed, then an investor will have a better idea of a company's potential.
Return on Assets Example
Shoeburger Corp has $100,000 in average total assets and the company has a net income of $25,000. To calculate the company's return on assets (also referred to as ROA), net income is divided by average total assets. For this example ROA is $25,000/$100,000 = .25 (25%). This means they receive a 25% return on assets.
Again, it is important to note that when reviewing the ROA of a particular company for analytical purposes, other similar companies should be reviewed in the same industry, as different industries experience varying return on assets ratios. Additionally, a higher ROA is better than a lower ROA. When reviewing return on assets over several periods, if it is falling this could be an indication there is a problem, but other factors need to be taken into consideration. Also, note that ROA does not take liabilities into consideration, so this calculation may reflect a higher profit percent than what is actually experience by the company.