Return on Assets & ROA Formula

The ability of a company to generate returns on its total assets

ROA Formula / Return on Assets calculation

Return on Assets (ROA) is a form of return on investment (ROI) and measures the profitability of a business in relation to its total assets. This ratio indicates how well a company is performing in making a profit from the capital it has invested in fixed assets.  The higher the return, the more productive and efficient management is in utilizing economic resources. Below you will find a breakdown of the ROA formula and calculation.

 

return on assets example

 

What is the ROA Formula?

The ROA formula is:

ROA = Net Income / Average Assets

 

Where,

Net Income is equal to net earnings or net income in year (annual period)

Average Assets is equal to ending assets minus beginning assets divided by 2

 

roa formula example

 

ROA formula example

Q: If a business has a net income of $10 million in current operations, and possesses $50 million worth of assets as per the balance sheet, what is its Return on Assets?

A: $10 million divided by $50 million is 0.2, therefore the business has a ROA of 20%. For every dollar of debt and equity the business takes on, it can return 20 cents in net profit (after all deductions).

For every dollar of assets the company invests in, it returns 20 cents in net profit per year.

 

What is the importance of Return on Assets?

The ROA formula is a vital ration in analyzing a company’s profitability. This ratio can be used when comparing a company’s performance between periods, or between two different companies of similar size and industry.

Note that it is very important to consider the scale of a business and the operations performed when comparing two different firms using ROA.

For example, a business that are capital-intensive and possessing high value fixed assets will have a higher asset base than a similar business with a lower asset base. Though the two may have a similar income, the business that is more capital-intensive will have a lower ROA due to the larger denominator.

 

What is Net Income?

Net income is the positive amount realized after deducting all the cost of doing business in a given period. This includes all interest on debt, income tax due to the government, dividends paid to equityholders and all operational and non-operational expenses.

Operational costs can include cost of goods sold, production overhead, administrative and marketing expenses, and amortization and depreciation of equipment and property.

Also added into net income is additional income arising from investments or those that are not directly resulting from primary operations, such as proceeds from the sale of equipment or fixed assets.

Net income/loss is found at the bottom of the income statement and divided into total assets to arrive at ROA.

 

Return on Assets in financial analysis

ROA is commonly used by analysts performing financial analysis of a company’s performance.

ROA is important because it makes companies more comparable.  Imagine two companies… one has net income of $50 million and assets of $500 million… the other has net income of $10 million and assets of $15 million.

Which company would you rather own?

The first company earns a return on assets of 10% and the second one earns a ROA of 67%.

 

Additional resources

Thanks for reading our guide to return on assets and the ROA formula.  To keep learning and become a world class financial analyst, these additional resources will be a big help: