EDUCBA Logo

EDUCBA

MENUMENU
  • Explore
    • EDUCBA Pro
    • PRO Bundles
    • Featured Skills
    • New & Trending
    • Fresh Entries
    • Finance
    • Data Science
    • Programming and Dev
    • Excel
    • Marketing
    • HR
    • PDP
    • VFX and Design
    • Project Management
    • Exam Prep
    • All Courses
  • Blog
  • Enterprise
  • Free Courses
  • Log in
  • Sign Up
Home Finance Finance Resources Finance Formula Return on Assets (ROA) Formula
 

Return on Assets (ROA) Formula

Madhuri Thakur
Article byMadhuri Thakur

Updated November 18, 2023

Return on Assets Formula

 

 

Return on Assets Formula

Return on Assets (ROA) Formula can help determine the profitability and efficiency of a business – ROA shows how much money will be earned by investing a dollar of assets.

A higher ROA shows that the company is utilizing its assets efficiently. This ratio shows how well a company performs by comparing its asset investment with its profitability.

Watch our Demo Courses and Videos

Valuation, Hadoop, Excel, Mobile Apps, Web Development & many more.

The formula for calculating Return on Assets (ROA) is as follows:

ROA Formula

Where,

  • Net Income: it is equal to net earnings in a financial year.
  • Average Total Assets: it is equal to a sum of total assets for the current year and total assets for the previous year divided by two.

Examples of Return on Assets Formula

Let’s see an example to understand Return on Total Assets:

You can download this Return on Assets Template here – Return on Assets Template

Jagriti Capital Inc. shows a net income of $20 million in current operations and owns $20 million worth of assets at the beginning of the year and $25 million worth of assets at the end of the year as per the balance sheet. Now, what is the return on assets of Jagriti Capital Inc.?

We can calculate the Return on assets by using the formula:

ROA = Net Income / Average Total Assets

Here,

  • Net Income = $20 Million
  •  Average Total Assets = (Assets at the beginning of the year + Assets at the end of the year)/2
  • i.e. Average Total Assets = $ (20 + 25) / 2
  • Average Total Assets = $ 22.5 Million

Now,

  • ROA = Net Income / Average Total Assets
  • ROA = $ (20/22.5)
  • ROA = 0.89

Explanation of Return on Assets Formula

To Calculate Return on Assets (ROA), we need Net Income and Average Total Assets.

The first component is Net Income.

Net income is the total net amount a company realizes after deducting all the business costs for a given period. It includes all operational and non-operational expenses, tax paid to the government, and interest paid on the debt. Operational costs include the cost of goods sold, the direct cost of production, General administrative & marketing expenses, and depreciation & amortization on fixed assets. Net income also includes any additional income rising through investments or any other source than the company’s primary operations, such as proceeds from the sale of fixed assets. Net income/loss can be found at the bottom of any company’s income statement.

The second component is the Average Total Assets.

Average total assets can be calculated as the sum of assets at the beginning of the year and assets at the end of the year divided by 2. Opening and Closing amounts of total assets are available in any company’s balance sheet.

To calculate the Return on Assets Formula, we must compare the Net Income to the Average Total Assets. i.e., ROA = Net Income / Average Total Assets

Significance and Use of Return on Assets Formula

Return on Assets formula is important for analyzing a company’s profitability. This can be used for comparing a company’s performance with different companies of similar size & industry or else can be used to compare the current performance of the company with its previous performance. Few things to keep in mind before comparing the companies based on Return on Assets. i.e. the companies’ Size, Scale, and Industry must be the same.

Return on assets should not be compared between companies from different industries. The requirement of assets in Companies from different industries may vary. For example, Auto industries require plant, property, and machinery to generate income as opposed to companies in the service industries. Therefore, companies in the auto industry would have a lower return on assets when compared to companies in the service industry, which do not require as many assets as Auto industries. Therefore, return on assets should not be used to compare with companies in a different industry.

Return on Assets (ROA) can help determine the profitability and efficiency of a business – ROA shows how much money will be earned by investing a dollar of assets. A higher ROA shows that the company is utilizing its assets efficiently. Return on Assets (ROA) can be used to determine the company’s structure, i.e., Whether the company is an asset-intensive or an asset-light company.

Asset-intensive companies will have a lower return on assets. Example of Asset-intensive companies is Auto company, Airline company, etc. Whereas an asset-light company will have a high return on assets. An example of an asset-light company can be a software company. As per Industry standards, An Asset-intensive company has a return on assets under 5%, and an asset-light company has a return on assets above 20%.

Return on Assets Calculator

You can use the following Return on Assets Calculator

Net Income
Average Total Assets
Return on Assets (ROA) Formula=
 

Return on Assets (ROA) Formula= =
Net Income =
Average Total Assets
0 = 0
0

Return on Assets Formula in Excel (With Excel Template)

Here, we will do the same example of the Return on Assets formula in Excel. It is very easy and simple. You need to provide the two inputs, i.e, Net Income and Average Total Assets

You can easily calculate the Return on Assets using the Formula in the template provided.

First, we need to calculate the Average Total Assets.

Return on Assets Example 1-1

Then, we calculate the Return on Assets using the formula.

Return on Assets Example 1-2

Recommended Articles

This has been a guide to a Return on Assets formula. Here, we discuss its uses along with practical examples. We also provide a Return on Assets Calculator with a downloadable Excel template. You may also look at the following articles to learn more –

  1. Difference Between Assets and Liabilities
  2. Asset Management and Wealth Management
  3. Guide to the Calculation CAPM Formula
  4. Enterprise Value Calculation with Examples

Primary Sidebar

Footer

Follow us!
  • EDUCBA FacebookEDUCBA TwitterEDUCBA LinkedINEDUCBA Instagram
  • EDUCBA YoutubeEDUCBA CourseraEDUCBA Udemy
APPS
EDUCBA Android AppEDUCBA iOS App
Blog
  • Blog
  • Free Tutorials
  • About us
  • Contact us
  • Log in
Courses
  • Enterprise Solutions
  • Free Courses
  • Explore Programs
  • All Courses
  • All in One Bundles
  • Sign up
Email
  • [email protected]

ISO 10004:2018 & ISO 9001:2015 Certified

© 2025 - EDUCBA. ALL RIGHTS RESERVED. THE CERTIFICATION NAMES ARE THE TRADEMARKS OF THEIR RESPECTIVE OWNERS.

EDUCBA

*Please provide your correct email id. Login details for this Free course will be emailed to you
Loading . . .
Quiz
Question:

Answer:

Quiz Result
Total QuestionsCorrect AnswersWrong AnswersPercentage

Explore 1000+ varieties of Mock tests View more

EDUCBA

*Please provide your correct email id. Login details for this Free course will be emailed to you
EDUCBA
Free Investment Banking Course

Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

By continuing above step, you agree to our Terms of Use and Privacy Policy.
*Please provide your correct email id. Login details for this Free course will be emailed to you
EDUCBA

*Please provide your correct email id. Login details for this Free course will be emailed to you

EDUCBA

Download Return on Assets Template

EDUCBA Login

Forgot Password?

EDUCBA

डाउनलोड Return on Assets Template

🚀 Limited Time Offer! - 🎁 ENROLL NOW