Return on assets Ratio

Return on assets (ROA) indicates how much profit a company brings in relative to its total assets. ROA gives a manager, investor or analyst a clear picture as to how effective a company’s management is at utilising its assets to generate revenue.

Ruetrn on Assets can also be termed as a return on investment because normally, capital assets often the biggest investment for most of the companies. In this case, the company invests money into capital assets and the return is measured in profits.

Formula to calculate Return on Assets Ratio

Return on Assets Ratio = Net Income/Average Total Assets

Example

Mike’s Automobile Showroom is a growing automobile company that has a few contracts to bring in new brands in downtown Chicago. Mike’s balance sheet shows beginning assets of $1,000,000 and an ending balance of $2,000,000 of assets. During the current year, Mike’s company had net income of $20,000,000. Mike’s return on assets ratio looks like this.

Return on Assets Ratio = $20,000,000 / ($1,000,000 + $2,000,000) / 2

ROA = 1,333.3%

The example above shows Mike’s ratio is 1,333.3%. This means every dollar that Mike invested in assets during the year produced $13.3 of net income. Depending on the economy, this can be considered as a healthy return rate regardless of the investment.