How To Calculate Return on Assets (ROA) With Examples

There are several measurements businesses and investors use to determine how well a company is performing, and one of the most stringent measurements in return on assets. Knowing how to calculate a company's return on assets can help investors determine whether to invest in a company and can help business owners measure how well their company is performing from one year to another in comparison to other companies in their industry.

In this article, we discuss everything you need to know about return on assets including how to calculate return on assets with examples.

What is return on assets?

Return on assets (ROA) is a ratio that tells you how much profit a company earns from its resources and assets. This information is valuable to a company's owners and management team and investors because it is an indication of how well the company uses its resources and assets to generate a profit. Return on assets is represented as a percentage. For example, if a company's ROA is 7.5%, this means the company earns seven and a half cents per dollar in assets.

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Importance of return on assets

Knowing how to calculate a company's return on assets is important because it is a valuable measurement that both investors and business owners can use to determine how efficient the company is at using its assets to generate a profit. You can begin by comparing a company's return on assets percentage from one year to another and looking for trends or changes. Doing this can help investors determine whether a company is likely to have potential issues in the future.

You can also use the company's return on assets percentage to compare the company to similar companies. However, it is important to make sure you are comparing numbers for companies that are similar in size and are in a similar industry. This will allow you to compare how well a company is performing compared to other companies. Generally, the higher a company's return on assets percentage is, the more efficient the company's management is in generating profit from its assets.

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Return on assets calculation methods

There are two separate methods you can use to calculate return on assets. The first method is to divide the company's net income by its total average assets. The second method is to multiply the company's net profit margin by its asset turnover rate.

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How to calculate ROA

There are two separate methods you can use to calculate return on assets. The first method is to divide the company's net income by its total average assets. The second method is to multiply the company's net profit margin by its asset turnover rate.

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How to calculate return on assets using net income and total assets

Follow these steps to calculate a company's return on assets using the company's net income and total assets:

1. Find the company's net income.

2. Find the company's total assets.

3. Divide net income by total assets.

1. Find the company's net income

The first step in calculating a company's return on assets using this method is to find the company's net income. Net income is the amount of total revenue that remains after accounting for expenses. This information can be found at the bottom of a company's income statement.

2. Find the company's total assets

The next step is finding the company's total number of assets or average total assets. Using the average total assets for your calculation may result in a more accurate calculation because a company's total assets can vary over time. This information can be found on the company's balance sheet.

3. Divide net income by total assets

Finally, find the quotient of the company's net income and total assets by dividing the company's net income by its total assets, with the net income being the numerator and the total assets being the denominator (Net Income / Total Assets). If needed, you can round the numbers for net income and total assets to make the calculation easier. Convert the resulting answer into percentage form to represent the company's return on assets.

How to calculate return on assets using net profit margin and asset turnover

Follow these steps to calculate a company's return on assets using the company's net profit margin and asset turnover:

1. Find the company's net profit margin.

2. Find the company's asset turnover.

3. Multiply net profit margin by asset turnover.

1. Find the company's net profit margin

You will need to begin by finding the company's net profit margin. This is done by dividing the company's net income by its total revenue, with the net income being the numerator and the total revenue being the denominator (Net Income/Total Revenue). This information can be found on the company's Form 10-K and annual report.

2. Find the company's asset turnover

The next step is to find the company's asset turnover. This is done by dividing the company's total revenue by its average assets, with the total revenue being the numerator and the average assets being the denominator (Total Revenue/Average Assets). This information can be found on the company's balance sheet and income statement.

3. Multiply net profit margin by asset turnover

Finally, find the product of the company's net profit margin and asset turnover by multiplying the two numbers together (Net Profit Margin x Asset Turnover). If needed, you can round the numbers for the company's net profit margin and asset turnover to make the calculation easier. Convert the resulting answer to represent the company's return on assets in percentage form.

Return on assets examples

The following examples show how to calculate return on assets using each of the methods described above. The first example uses the company's net income and average total assets for the calculation. The second example uses the company's net profit margin and asset turnover for the calculation. The following data is used for each example:

• Net income: $150,000.00

• Average total assets: $800,000.00

• Total revenue: $1,500,000.00

Method 1 example

To find the company's return on assets using its net income and average total assets, simply divide the company's net income ($150,000) by its average total assets ($800,000). 150,000 / 800,000 = 0.1875. Then convert the resulting quotient to represent the company's return on assets as a percentage (0.1875 x 100 = 18.75%). The company's return on assets is 18.75%.

Method 2 example

To find the company's return on assets using its net profit margin and asset turnover, begin by finding the company's net profit margin by dividing the company's net income ($150,000) by its total revenue ($1,500,000). $150,000 / $1,500,000 = 0.1 (10%).

Next, find the company's asset turnover by dividing the company's total revenue ($1,500,000) by its average total assets ($800,000). $1,500,000 / $800,000 = 1.875. Finally, multiply the company's net profit margin (0.1) by its asset turnover (1.875). 0.1 x 1.875 = 0.1875. The company's return on assets is 0.1875 x 100 = 18.75%.