How to Use a Return on Assets Formula (With Examples)

By Indeed Editorial Team

Updated September 15, 2022

Published November 30, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

If you want to determine how well the company you work for is doing, you may need to calculate its return on assets (ROA). This allows you to assess the amount the company is earning from its resources and assets. Knowing how to perform this calculation can show investors and business owners how the company is performing compared to its competitors. In this article, we explain what a return on assets formula is, discuss why the calculation is important and outline the steps with examples to calculate ROA.

Related: How to Calculate Growth Percentage (With Examples)

What is a return on assets formula?

A return on assets formula is a calculation that allows you to determine how much of a 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's an indication of how well the company uses its resources and assets to generate a profit. Return on assets is a percentage. For example, if a company's ROA is 7.5%, this means the company earns 7.5 cents per dollar in assets.

There are two formulas you can use to calculate a 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.

Related: Profit Centre: Definition, Important and Examples

Importance of return on assets

Knowing how to calculate a company's return on assets is important because it's 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 return on assets percentage to compare the company to similar companies. It's important to make sure you're comparing numbers for companies that are similar in size and are in a similar industry. This allows you to assess how well a company is performing compared to other companies. The higher a company's return on assets percentage is, the more efficient the company's management is in generating profit from its assets.

Related: What Is the Difference Between Profit and Profitability?

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

To calculate a company's return on assets using its net income and total assets, follow these steps:

1. Determine the time period

Start by choosing a specific period you're interested in calculating. For example, you can look at the company's return on assets over a month, a quarter, a year or the entire time the business has been operating. The company's ROA may change depending on the time of year, so calculating it regularly can be beneficial.

2. Find the company's net income

Then, find the company's net income. This is the amount of total revenue a company earned after subtracting its expenses. You can typically find this information at the bottom of a company's income statement.

Example: The company you work for earned $190,000 last year but had $45,000 in expenses. This means their net income is $145,000.

Related: How to Calculate Net Income for an Individual and a Business Organization

3. Find the company's total assets

Next, look for the company's total number of assets or average total assets. You can use either number, but using the average total assets may result in a more accurate calculation as a company's total assets can vary over time. The assets a company has typically depend on the type of work they do, but it can include real estate, vehicles, technology, furniture or intellectual property. You can typically find the company's average total assets on its balance sheet.

Example: The company you work for owns the office building they work in and everything in it. This means their average total assets are worth $1,000,000, based on the value of the building and equipment and property inside.

Related: A Guide on How to Calculate Total Assets (With Examples)

4. Divide net income by total assets

After finding both numbers, you can calculate the company's return on assets. Here is the formula you can use to do this:

Net income/total assets

Using the numbers from the examples above, your formula would look like this:

$145,000/$1,000,000 = 0.145

5. Make it a percentage

To analyze your results easily, convert the number into a percentage. You can do this by multiplying the number you got by 100. With the example from above, this is what the completed formula would look like:

0.145 x 100 = 14.5%

Your return on assets is 14.5%.

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

Follow these steps to learn how to calculate return on assets using net profit margin and asset turnover:

1. Determine the time period

With this formula, you can start by choosing a specific period of time you're interested in evaluating. Remember, you can look at the company's return on assets over a month, a quarter, a year, or the entire time the business has been operating. Each time period may generate different results.

2. Find the company's net profit margin

Once you choose the time period, find the company's net profit margin during that time. You can do this by dividing the company's net income by its total revenue. Look for this information on the company's annual report. Here's what the formula should look like:

Net income/total revenue

Example: The company you work for made $600,000 in total revenue last year, but after expenses, their net income was $525,000. This means their net profit margin is 0.875 (525,000/600,000 = 0.875).

Related: How to Calculate Net Profit Margin (With Examples)

Next, find the company's asset turnover rate. To do this, divide the company's total revenue by its average assets. You already have the company's total revenue from the previous step and you can find its average assets on the balance sheet. The resulting number shows you the company's asset turnover, which tells you how efficient the company is at using its assets. Here's what the formula should look like:

Total revenue/average assets

Example: The company you work for earned $600,000 last year before expenses and other deductions. This is their total revenue. They have an average of $900,000 in assets. Using the formula, $600,000/$900,000, their asset turnover is 0.66.

4. Multiply net profit margin by asset turnover

Finally, to find the company's return on assets using this method, multiply the net profit margin and asset turnover, the two numbers you found in the previous steps:

net profit margin x asset turnover

You can round the numbers to make the calculation easier. Using the numbers from the example above, here's the final formula:

0.875 x 0.66 = 0.577

5. Make it a percentage

To analyze your results easily, convert the number into a percentage. You can do this by multiplying the number you got by 100. With the example from above, this is what the completed formula would look like:

0.577 x 100 = 57.7

Your return on assets is 57.7%

Related:

  • What Is Fixed Asset Turnover Ratio? (With Applications)

  • How to Use the Total Asset Turnover Formula (With Examples)

Return on assets examples

To further help you understand how to calculate a company's return on assets, consider two more examples using each method we discussed:

Net income and average total assets method

To find the company's return on assets using its net income and average total assets, simply divide the company's net income by its average total assets.

For example, if the company's net income was $150,000 and its average total assets were $800,000, this is what your formula would look like: 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%). This method determines that the company's return on assets is 18.75%.

Net profit margin and asset turnover method

To find the same 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 by its total revenue. Imagine the company's total revenue was $1,500,000. This would create the following formula: $150,000/$1,500,000 = 0.1 (10%).

Next, find the company's asset turnover by dividing the company's total revenue by its average total assets. Resulting in this formula: $1,500,000/$800,000 = 1.875. Finally, multiply the company's net profit margin by its asset turnover. The formula for this is 0.1 x 1.875 = 0.1875, which you can multiply by 100 to find the percentage amount. This method determines that the company's return on assets is 18.75%.

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