Return on Total Assets (ROA) Calculator
What is Rate of Return on Total Assets (ROA)?
Return on Total Assets (ROA) is a financial ratio that indicates how profitable a company is relative to its total assets. It provides insight into how efficiently a management team is using its assets to generate earnings. Essentially, it tells you how many dollars of earnings they derive from each dollar of assets they control.
The ROA Formula
To calculate the rate of return on total assets, we use the following formula:
Where Average Total Assets is calculated as:
Example Calculation
Suppose a local bakery has the following financial data for the fiscal year:
- Net Income: $15,000
- Assets at start of year: $80,000
- Assets at end of year: $120,000
Step 1: Calculate Average Total Assets: ($80,000 + $120,000) / 2 = $100,000.
Step 2: Divide Net Income by Average Assets: $15,000 / $100,000 = 0.15.
Step 3: Convert to percentage: 0.15 x 100 = 15%.
Why ROA Matters for Your Business
Investors and managers use ROA to compare companies within the same industry. A higher ROA indicates that the company is more effective at converting its investments into profit. If a company has a low ROA compared to its peers, it may suggest that the business is asset-heavy or inefficient in its operations.
Key Components of the Calculation
- Net Income: This is the total profit after all expenses, taxes, and interest have been deducted. It is found at the bottom of the income statement.
- Average Assets: Because asset levels change throughout the year, using an average of the beginning and ending balance sheet totals provides a more accurate representation of the capital used to generate the year's income.