Return On Assets Formula

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The return on assets formula, or RoA measures the efficiency of assets used in a business to generate profits. In simple terms, the return on assets formula will tell you what a company can do, with what its got. It is the most widely used profitability ratio when comparing companies in the same industry.

 

Return On Assets Formula

 

return on assets formula

 

A low RoA  when compared to the industry average indicates an inefficient use of business assets. However, a high RoA figure does not necessarily indicate that a company is using its assets efficiently. A company carrying highly depreciated and old assets will also have a high RoA figure. Also, since assets are carried at historical values, they remain understated during inflationary periods. Hence, RoA during times of high inflation may be misleading.


Companies in industries that employ significant fixed assets, infrastructure companies for example, tend to have a lower RoAs compared to industries that employ fewer amounts of fixed assets such as technology companies. Below we will show you how to use the return on assets formula in an example:

 

Bobs landscaping company generated a profit of $ 500 000 over the course of the year. You initially noted that bob owned $50 000 in assets in January, and owned $62 500 in December.

 

Net Income$500 000

Average Assets = $50 000 + $62 500 / 2

Return on Assets = $500 000 / $56 250

RoE = 8.8%

 

Now lets look at a RoE of a technology company. Joe's software company generated a profit of $500 000 over the course of the year. You initially note that Joe owned $20 000 in assets in January, and owned $25 000 in assets in December.

 

Net Income = $500 000

Average Assets = $20 000 + $25 000 / 2

Return on Assets = $500 000 / $22 500

RoE = %22.2

 

 

These two scenarios are an excellent example of why the return on assets formula must only be used to compare companies from the same industry. Both companies did extremely well, but because Bob requires more assets to produce an end product, his return will be significantly lower. Ideally, investors would like to see a RoE of at least 5%.

Profitability Ratios Introduction

Return On Equity

Return On Capital Employed

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Return on Assets Formula
Article Name
Return on Assets Formula
Description
Stocktrades explains how to calculate the return on assets formula, which is a formula to determine how well a business's assets are used to generate profit
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Stocktrades Ltd
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