Definition
The financial metric return on assets, or ROA, is a profitability ratio that analyzes management's ability to earn a fair return on the money invested in the assets of a company. Only two variables are required to determine return on assets: net income and total assets.
Calculation
Return on Assets (%) = (Net Income / Total Assets) x 100
Where:
Total Assets = the average total assets of the company, typically found by adding two yearend values for total assets and dividing by two.
Explanation
Income is derived from assets in use throughout the year, including the purchase of new plant and equipment. For this reason, total assets are typically calculated as an average value for the year.
Several profitability ratios examine the relationship between revenues and income. Return on assets is a measure that relies on the balance sheet as well as the income statement. The assets required to produce revenues will vary by industry. When drawing conclusions about the relative performance of a company, benchmark comparisons should be made with competitors in the same industry.
Example
The income statement for Company A indicates net income of $4,283,000 in the current year. Company A's balance sheet indicates total assets of $30,156,000 in the prior year and $31,616,000 in the current year. The return on assets for Company A would be:
= ($4,283,000 / (($30,156,000 + $31,616,000) / 2)) x 100
= ($4,283,000 / ($61,772,000 / 2)) x 100
= ($4,283,000 / $30,886,000) x 100, or 13.9%
Related Terms
balance sheet, assets, net income, return on equity, abnormal return
