How do I calculate the return on assets?
In this article, we will discuss the calculation of the return on assets (ROA) ratio in the context of financial analysis. ROA is a financial metric that measures a company’s ability to generate profit from its assets.
What is Return on Assets?
Return on assets (ROA) is a profitability ratio that measures the effectiveness of a company in utilizing its assets to generate profit. It shows how efficiently a company can generate earnings from its available resources.
Calculating Return on Assets
To calculate the return on assets, you need to divide the net income of the company by its average total assets. The formula for ROA is:
ROA = Net Income / Average Total Assets
Step 1: Calculate the Average Total Assets
To calculate the average total assets, you need to take the sum of the total assets at the beginning and end of the period and divide it by two. The formula for average total assets is:
Average Total Assets = (Total Assets at the Beginning + Total Assets at the End) / 2
Step 2: Calculate the Net Income
Net income is the total profit earned by the company after deducting all expenses and taxes. It can be found on the company’s income statement. Ensure that you use the net income figure for the same period as the average total assets.
Step 3: Calculate the Return on Assets
Using the formula mentioned earlier, divide the net income obtained in Step 2 by the average total assets obtained in Step 1:
ROA = Net Income / Average Total Assets
The resulting value will be a percentage that represents the return on assets for the given period. Higher ROA values indicate better profitability and asset utilization.
By Astrobulls research pvt ltd