The return on assets ratio, often called the return on total assets, is a profitability ratio that measures the net income produced by total assets during a period by comparing net income to the average total assets. In other words, the return on assets ratio or ROA measures how efficiently a company can manage its assets to produce profits during a period.
The return on assets ratio formula is calculated by dividing net income by average total assets.
Average total assets are usually used because asset totals can vary throughout the year. Simply add the beginning and ending assets together on the balance sheet and divide by two to calculate the average assets for the year. The net income can be found on the income statement
To find the ROA for Microsoft Corporation (MSFT):
Our calculations show the ROA to be 0.07 or 7%
Head over to Yahoo Finance and search for the name of the company you are researching. On the left column, under ‘Financials’, select Balance Sheet or Income Statement.
We first go to the Balance Sheet of the company and take the average result, in this case, we used 2 years of results (2014 & 2015).
Then looking at the Income Statement, we grab the Net Income figure.
- Quick way to screen companies
- Compare two or more companies in the same industry
- Evaluate efficiency of management in utilising its assets
- Subjected to distortion as some companies are asset-heavy while others are asset-light when comparing
Since company assets’ sole purpose is to generate revenues and produce profits, this ratio helps both management and investors see how well the company can convert its investments in assets into profits. You can look at ROA as a return on investment for the company since capital assets are often the biggest investment for most companies. In this case, the company invests money into capital assets and the return is measured in profits.
In short, this ratio measures how profitable a company’s assets are.