![]() ![]() If a firm’s return on assets stays high for a long time, it tells analysts, investors, and portfolio managers that it might be a good investment opportunity. This market indicator aims to give you a glimpse of how well a corporation manages its assets in terms of generating net income out of them. In this article, we’ll explain what ROA is with some simple examples, and show how this financial ratio can be used in the analysis of a business’ profitability. ROA can give you a lot of hints on what’s going on with a particular company and how effective it’s managed. However, comparing companies from different industries is meaningless as asset utilization varies significantly.Return on Assets (ROA) is one of the key fundamental indicators used by financial analysts. The ratio can be used to compare companies of the same scale and in a similar industry. Inherently, a positive ratio signifies an upward trend for profit. A higher Return on Total Assets value indicates favorable healthy asset utilization to produce greater earnings, eventually attracting investors. It is one of the important profitability metrics that allows an analyst to assess the effectiveness of a company in its asset utilization. ![]() Return on Total Assets = EBIT / Average Total Assets Relevance and Uses of Return on Total Assets Formula Step 3: Finally, the formula for Return on Total Assets can be derived by dividing the company’s EBIT (step 1) by its average total assets (step 2), as shown below. Now, add the values for total assets and divide by 2 to arrive at the average total assets. The total assets include short-term and long-term assets for the period under consideration. Step 2: Next, determine the company’s total assets at the beginning and the end of the current year. Add the interest expense and tax to the net income to compute the company’s EBIT.ĮBIT = Net Income + Interest Expense + Tax Next, determine the interest expense incurred and corporate taxes paid during the year. Step 1: First, calculate the company’s net income from its income statement. The formula for Return on Total Assets can be derived by using the following steps: stood at 20.55% for the year ending on September 29, 2018. Therefore, Return on Total Assets for Apple Inc. Calculate the Return on Total Assets for Apple Inc. Further, the total asset at the beginning and end of the year stood at $375,319 Mn and $365,725 Mn, respectively. ![]() As per the annual report for the year ending September 29, 2018, the interest expense and provision for income taxes for the year stood at $3,240 Mn and $13,372 Mn, respectively. Take the real-life example of Apple Inc., which reported a net income of $59,531 Mn during the last reported financial year. Return on Total Assets Formula – Example #3 Therefore, ABC Ltd managed a Return on Total Assets of 2.375% during the last reported year. The formula to calculate Average Total Assets is as below:Īverage Total Assets = (Opening Total Assets + Closing Total Assets) / 2 The formula to calculate EBIT is as below:ĮBIT = Net Income + Interest Expense + Income Taxes Calculate the Return on Total Assets for ABC Ltd based on the latest reported financials. Further, as per the balance sheet, the opening and closing value of the total assets is $3,900,000 and $4,100,000, respectively. Per its income statement, the interest expense and income taxes stood at $15,000 and $30,000, respectively. Let us take the example of ABC Ltd, which reported a net profit of $50,000 on a turnover of $500,000. Return on Total Assets Formula – Example #2 ![]() Therefore, the company reported a Return on Total Assets of 1.50% during the period. Return on Total Assets = EBIT / Average Total Assets The formula to calculate Return on Total Assets is as below: ![]()
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