Return on Assets Definition and Example
Return on Assets Definition – “A measure of the productivity of a company’s assets. To calculate ROA, divide net income by total assets”.
In simple words, it is the measure of company’s efficiency in generating income from the total assets available with the organization. This ratio is helpful for both investors as well as company. It shows both the parties about how well the assets are utilized in order to earn additional revenues.
Most of the companies sees return on assets as return on investments. As huge investment on behalf of company is made in the capital assets. In short and simple words, this ratio reflects the profitability of the company’s assets. Hence it comes under the profitability ratios.
ROA = Net Income/ Average Total Assets
Here, average total assets has been taken as the assets of the company changes during the year. Therefore, average total assets = (assets in the beginning of the year + assets at the end of the year)/2
Return on Assets Example
To understand return on assets definition clearly, let’s discuss an example.
ABC Ltd has the assets of Rs 5,00,000 in the beginning and Rs. 6,00,000 at the end of the year. During the year, company has earn the net income of Rs. 15,00,000. Calculate ROA
Return on Assets = (15,00,000/ 5,50,000) × 100
= 2.7 × 100
= 270 %
The ratio of the above company is 270%. This means that every rupee that the firm invested in assets during the year produce Rs. 2.7 of net income.
Related Financial Terms of Return on Assets
- Return on Equity Definition – ROE Meaning and Importance
- Profitability Ratios Definition – Meaning and Examples
Return on Assets Interpretation
This ratio is very important from the perspective of both investor and company. It shows how effectively the organization is utilizing its asset in producing the revenue. In simple words, it indicates how efficient the management in transforming the money invested in the assets into the profits.
Higher ROA ratio is favorable for the enterprise. It signifies the efficiency of the organization in converting the money investment made in the assets. On the other hand, lower ROA ratio signifies the incompetent and inefficient management.