What is Return on Assets
Return on assets is a ratio to measure the company’s profitability from operating the business. The return on assets indicates the amount of net income that the business generated by each dollar of its assets. ROA can be calculated by dividing net income by average total assets.
To put it simply, the return on assets indicates that’s how many dollars the business generated from using their assets every dollar. For example, 10 times of return on assets mean the business generates 10 dollars for every 1 dollar of its assets.
The return on assets (ROA) answer that the company’s manager uses their assets effectively?
Key Points
- Return On Assets is a comparation between net income and all assets (average assets in a period) of the company.
- The return on assets (ROA) ratio indicates the amount of net income that the company generated by each dollar of its assets
- The higher the return on assets, the more profit that the company generate from their assets.
How to Calculate Return on Assets
Return on assets ratio can be calculate by dividng the net income by average total assets. While the “Average assets” can be calculated by adding total assets at the beginning of the period and at the end of the period, and deviding by 2.
Return on Assets = Net Income ÷ Average Total Assets
Average Total Assets = (Total asset at the beginning period + Total asset at the ending of te period) ÷ 2
Example: the Feriors company’s balance sheet shows the net income of $10 million, the total assets at the beginning of the period of $1 million, and the total assets at the end of the period of $2 million.
Average Total Assets = (1 Million + 2 Million) ÷ 2 Million = 1.5 Million
Return on Asset = 10 Million ÷ 1.5 Million = 6.67 times
The Feriors’ return on asset is 6.67 times which means the company generates 6.67 dollars for each 1 dollar of the asset they have.
Return on Assets Meaning
The meaning of return on assets (ROA) is how effectively that the company used their assets to generate their profit. The higher the return on assets, the more profit that the company generates from their assets.
A higher value of the return on assets (ROA) suggests favorable efficiency use of assets. In contrast, the lower value (lower than last period or lower than the industry average) means the company might not manage their assets to generate income effectively.
For example, 8 times of return on asset means the company generate 5 dollars for each 1 dollar of the asset they have.
