In this Return on Assets Calculator:
- Net Income ($): This represents a company’s profit after all its expenses have been accounted for. To arrive at the net income, you’d subtract operational costs, taxes, and interest from the company’s total revenue. If you’re looking to locate this figure, turn your attention to the company’s income statement.
- Average Total Assets ($): To understand a company’s average total assets during a specific period, you’d need to consider the total assets available at both the beginning and the end of that period. To calculate, simply add the starting and closing total assets and then divide by two. This essential data is readily available on the company’s balance sheet.
Return on Assets (ROA) Formula & Example
The Return on Assets (ROA) sheds light on the efficiency with which a company leverages its assets to produce profit. Expressed as a percentage, ROA is determined by taking the ratio of the company’s annual net income to its total assets.
To break it down, you can compute ROA using the following formula:
ROA = (Net Income / Average Total Assets) * 100%
To elucidate the concept, let’s walk through a practical example.
Consider Company X, an emerging force in the tech industry. Over the preceding year, Company X reported a net income of $2 million. Their total assets at the year’s inception stood at $10 million, swelling to $14 million by year-end.
The first step involves determining the Average Total Assets:
Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2 = (10 million + 14 million) / 2 = 12 million
Next, you’d integrate this into the ROA formula:
ROA = (Net Income / Average Total Assets) * 100% = (2 million / 12 million) * 100% = 16.67%
An ROA of 16.67% suggests that for every dollar’s worth of assets Company X held over the year, it yielded close to 17 cents in profit. Such a metric is invaluable to stakeholders. It allows them to evaluate the efficacy with which Company X’s management team deploys its assets for profit generation. By juxtaposing this with figures from analogous companies, investors and analysts can glean insights into the relative operational efficiency of the firm in question.
