Return on Assets ROA Formula, Examples & Uses

Publié le 17 janvier, 2024

What Is Return on Assets (ROA)?

Return on assets (ROA) is a financial ratio that measures the profitability of a company with respect to its total assets. It is used by managers, investors, and financial analysts to measure the financial health of a given company, as this ratio is considered a solid metric to assess the return on investment. ROA is widely used as it gives a clear idea about an organization’s efficiency in converting the money invested in assets into net earnings. Therefore, the higher the value of this ratio, the better. This holds true as long as the ROA value is positive. A negative value indicates that the company is incurring losses, not generating profits.

For example, an investor calculates the ROAs of Company A and Company B to check their profitability levels before making an investment decision. Assuming that the resulting ROAs have values of -10% and 5%, respectively, what is the best investment that can be made? First, -10% indicates that Company A is incurring losses, while a 5% ROA indicates that Company B is profitable. Hence, the investor should invest in Company B and not in Company A.

The return on assets is a proxy that measures the efficiency of a company to convert total assets into net income.

Machinery

Return on Assets (ROA) Formula

The return on assets is calculated using the following formula:

$$ROA = (Net income / Total Assets) * 100 $$

Net income, which is also referred to as net earnings, refers to the total sales of a company minus expenses (e.g., cost of goods sold, interest, taxes, other expenses). It also refers to the net earnings generated by the company available to be either reinvested or distributed among shareholders. This value is always reported in the income statement, which is a statement that reports how much a company generated or lost in a given period. Total assets refers to the monetary value of total assets (both short-term and long-term) owned by the company (e.g., cash, prepaid insurance, account receivables, property, plants, and equipment). This value is always recorded in a company’s balance sheet, which lists all of the company’s accounts (e.g., assets and liabilities).

ROA indicates the percentage return for each invested amount in total assets. In other words, it states how much money is generated for each dollar invested in total assets. For instance, a value of 5% indicates that the company generates $0.05 for each $1 invested in total assets.

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How to Calculate Return on Assets (ROA)?

The calculation of the return on assets is straightforward and consists of three steps.

Step 1: Identify the net income

The first step to calculate the return on assets is to derive the net income from the income statement. For instance, the net income of Company Y is $840.

Income statement of Company Y for the year ending 2021.

Income statement

Step 2: Identify total assets

The second step is to derive the value of total assets from the balance sheet. In the case of Company Y, the total assets are $5,780.

Balance Sheet of Company Y for the year ending 2021.

Balance sheet

Step 3: Apply the ROA formula and interpret the results

While the first and second steps consist of identifying and determining the inputs needed, the last step applies the return to assets formula. For Company Y, the return on assets equals ($840/$5,780)*100 = 14.53%.

This means that the company generates $0.1453 for each $1 invested in total assets.

Return on Assets Calculation Example

Assume an investor wants to invest an amount of money in the Telecom industry, which has only two major players in their country (Company A and Company B). The net incomes of Company A and Company B ($ in millions) have the values of $15 and $5, respectively, and the total asset values of Company A and Company B ($ in millions) have values of $360 and $45, respectively. If the investor will invest in only one company, which is the better value?

To make a solid investment decision, an investor will need to compare both companies based on their profitability. Given the data on hand, the ROA of each company needs to be calculated. For Company A, the ROA is ($15/$360)*100 = 4.17%. But Company B’s ROA is ($5/$45)*100 = 11.11%. Even if Company B generates a lower income compared to Company A and has fewer assets, it provides a more profitable investment. An investor should invest in Company B.


The return on assets is measured by companies over time for different purposes, which include, but are not limited to:

  • Determining profitability levels and efficiency: The return on assets enables companies to measure their profitability levels and how efficiently they generate income over time. For instance, if the return on assets decreases over time (yearly decrease), it indicates that the company is becoming less efficient in managing its assets and less profitable.
  • Comparing performance between competitors: The return on assets is used by companies as benchmarks for their performance compared to competitors. In other words, companies use this ratio to determine if their performance compared to competitors is high or low. If a company has low performance compared to competitors, managers need to identify the reason(s) why. Perhaps a competitor adopted new technology (e.g., new machinery) that reduced their cost of manufacturing by 15%, giving it a strong competitive advantage. This would decrease a less innovative company’s market share.
  • Determining assets intensive/light companies: The return on assets allows companies to determine the degree to which the company relies on its assets. A company with a high ROA is an asset-light company, and a company with a low ROA is an asset-intensive company. Software companies are asset-light, and airline companies are asset-intensive.

Companies use ROA to benchmark their profitability to competitors.

Benchmark


Return on assets (ROA) is a financial ratio that measures the profitability of business organizations. It states, in percentage terms, how much revenue is generated for the investment in total assets. To calculate it, three main steps are required. First, the net income needs to be identified on the income statement, where the net income refers to the net earnings generated by the company after deducting all expenses. Second, the value of total assets needs to be identified from the balance sheet, where total assets refer to the value of the short-term and long-term assets owned by the company. Third, the ROA formula needs to be applied:

$$ROA = (Net income / Total Assets) * 100 $$

The return on assets ratio is used by companies to analyze the development of the ratio over time to assess their profitability and efficiency. Companies also use the ROA as a benchmark for their performance compared to competitors. Finally, the ROA is used to detect if the company is asset-light or asset-intensive.


Video Transcript

Return on Assets Defined

Have you ever wondered what all the hoopla is about financial statements? Sure, they tell companies just how well they are doing, and they tell other people who are interested just how well a company is handling business operations, but how do they do that? The answer is that the financial statements provide the numbers needed to calculate specific ratios. One of those ratios is return on assets. What exactly is return on assets?

Return on Assets is a financial statement ratio that measures how well a company uses its assets to generate revenue. This ratio is usually abbreviated as ROA, and it’s a measure of profitability.

ROA Computation

Wasabi International
Income Statement
For the period ending December 31, 2013
Revenues
Sales $856,000.00
Expenses
Wages Expense $382,000.00
Supplies Expense $184,800.00
Utilities Expense $120,000.00
Interest Expense $15,000.00
Total Expenses $701,800.00
Net Income $154,200.00
WASABI INTERNATIONAL Balance Sheet 31-Dec-13
Assets Liabilities
Current Assets Current Liabilities
Cash $100,000.00 Accounts Payable $140,000.00
Accounts Receivable $75,000.00 Salaries Payable $50,000.00
Inventories $200,000.00 Interest Payable $15,000.00
Prepaid Insurance $25,000.00 Taxes Payable $5,000.00
Total Current Assets $400,000.00 Total Current Liabilities $210,000.00
Noncurrent Assets Long-term Liabilities
Property, Plant & Equipment Notes Payable $60,000.00
Land $25,000.00 Bank Loan $65,000.00
Building & Equipment $150,000.00 Total Liabilities $125,000.00
Stockholder’s Equity
Capital Stock $100,000.00 (150,000 shares outstanding)
Retained Earnings $140,000.00
Total Stockholder’s Equity $240,000.00
Total Assets $575,000.00 Total Liabilities & Stockholder’s Equity $575,000.00

Now, in order to calculate ROA, you will need figures from two of the financial statements. The first figure you will need comes from the income statement. The income statement is the first financial statement generated and tells how much money a company made or lost in a given time period. The figure that you are looking for on the income statement that is used in calculating ROA is net income. Net income is found on the very last line of the income statement.

The second figure that you need when calculating ROA comes from the balance sheet. The balance sheet is the third financial statement generated and lists all the accounts that a company has as well as their balances. The number that you need from the balance sheet to calculate ROA is the dollar amount of total assets. This number is the last number found on the left side of the balance sheet.

Once you have both the numbers that are required in the ROA formula, you simply divide the net income by the total assets. The formula, when written, looks just like this:

ROA = NET INCOME / TOTAL ASSETS

Example Calculation

Look at the balance sheet and income statement from Wasabi International.

The company has net income of $154,200 that appears on the income statement. The total assets from the balance sheet are $575,000. If we substitute these numbers into the ROA formula we get this:

ROA= $154,200 / $575,000

So the ROA = 0.27

So the return on assets for Wasabi International is 27%.

ROA Interpretation

What exactly does a 27% return on assets mean? The return on assets calculation measures just how much revenue is generated by the assets that the company holds. In this case, for every one dollar in assets, Wasabi International is generating $0.27 of revenue. This may sound like very little, but in all actuality, this is a very good ratio and means that the powers that be in the company are wisely managing the assets that they have. This would make Wasabi International very interesting to potential investors.

Lesson Summary

Return on Assets, which is abbreviated as ROA, is a ratio that measures how well a company uses its assets to generate revenue. It is calculated by dividing net income by total assets. The figures that are needed to calculate the ROA are found on two of the financial statements. Net income is found on the income statement, which is the financial statement that measures how much money a company made or lost in a given time period. Total assets are found on the balance sheet, which is the financial statement that lists all the company accounts and their balances.

Once you have the numbers needed for the formula and perform the calculation, you have the ROA percentage, which tells you just how much revenue a company generates for every dollar of assets that it holds. This figure ultimately helps potential investors make the decision whether or not to make an investment into the company.

Learning Outcomes

When this lesson is over, you should be able to:

  • Define Return of Assets
  • Describe how to calculate for return on assets


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