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Return on Assets


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Examples

Example 1:

Calculate ROA for Wilson Swimwear, when:

  • Total assets on start date = $2,132,000
  • Total assets on end date = $2,434,000
  • Annual net income = $212,000
  • Average total assets = (asset value on start date + asset value on end date) ÷ 2 = ($2,132,000 + $2,434,000 ) ÷ 2 = $2,283,000
  • Return on assets = annual net income ÷ average total assets = $212,000 ÷ $2,283,000 = 0.09 = 9%

Example 2:

Calculate beginning total assets for Theo’s Florist, when:

  • Total liabilities = $942,000
  • Total equity = $1,610,000
  • Annual net income = $315,000.
  • Annual RoA = 0.12
  • RoA = annual net income ÷ [(total assets on start date + total assets on end date) ÷ 2]
  • Average total assets = net Income ÷ ROA = $315,000 ÷ 0.12 = $2,625,000
  • Total assets on end date = total liabilities + total equity = $942,000 + $1,610,000 = $2,552,000
  • Total assets on start date = (2 × $2,625,000 ) − $2,552,000 = $2,698,000

Return on Assets Definition

This ratio measures the value of profits generated by the total value of assets of a business during a financial year. This ratio tells investors and analysts how efficiently a business uses its assets to generate net income. It is a profitability ratio. Literally, RoA indicates the number of cents earned by each dollar of asset value.

NOTES:

  • Net income is after-tax income. It can be found on company income statements.
  • Average total asset value is calculated by adding the values of total assets at the beginning and end of a financial year and then dividing by 2.
  • Total assets at the beginning and at the end of the year can be obtained from year-end balance sheets of two consecutive financial years.

Analysis

Higher return on assets values show that a business is more profitable. This ratio should be only used to compare companies in the same industry. Companies in some industries need more expensive plant and equipment to generate income than others. Increasing RoA trends indicate that a company’s profits are improving. Conversely, a decreasing trend means that profitability is falling.