Return on Total Assets Formula

Return on Total Assets Formula (Table of Contents)

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What is Return on Total Assets Formula?

The term “Return on Total Assets” refers to the financial ratio that is used as an indicator to check how well a company is able to use its assets to generate earnings during a specific period. In other words, it measures the profitability of the available assets of the company. The formula for Return on Total Assets can be derived by diving the company’s earnings before interest and taxes (EBIT) by its average total assets. Mathematically, it is represented as,

Return on Total Assets Formula – Example #1

Let us take the example of a company with reported earnings before interest and taxes (EBIT) of $75,000 as per the income statement. As per the balance sheet for the year ending on December 31, 2018, the average total assets of the company stood at $5,000,000. Calculate the Return on Total Assets for the company during the period.

Solution:

Return on Total Assets is calculated using the formula given below

Return on Total Assets = EBIT / Average Total Assets

• Return on Total Assets = $75,000 / $5,000,000
• Return on Total Assets = 1.50%

Therefore, the company reported a Return on Total Assets of 1.50% during the period.

Return on Total Assets Formula – Example #2

Let us take the example of ABC Ltd that reported a net profit of $50,000 on a turnover of $500,000. As per its income statement, the interest expense and income taxes stood at $15,000 and $30,000 respectively. Further, as per the balance sheet, the opening and closing value of the total assets is $3,900,000 and $4,100,000 respectively. Calculate the Return on Total Assets for ABC Ltd based on the latest reported financials.

Solution:

EBIT is calculated using the formula given below

EBIT = Net Income + Interest Expense + Income Taxes

• EBIT = $50,000 + $15,000 + $30,000
• EBIT = $95,000

Average Total Assets is calculated using the formula given below

Average Total Assets = (Opening Total Assets + Closing Total Assets) / 2

• Average Total Assets = ($3,900,000 + $4,100,000) / 2
• Average Total Assets = $4,000,000

Return on Total Assets is calculated using the formula given below

Return on Total Assets = EBIT / Average Total Assets

• Return on Total Assets = $95,000 / $4,000,000
• Return on Total Assets = 2.375%

Therefore, ABC Ltd managed a Return on Total Assets of 2.375% during last reported year.

Return on Total Assets Formula – Example #3

Let us take the real-life example of Apple Inc. that reported net income of $59,531 Mn during the last reported financial year. 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. Further, the total asset at the beginning of the year and at the end of the year stood at $375,319 Mn and $365,725 Mn respectively. Calculate the Return on Total Assets for Apple Inc. based on the given information.

Solution:

EBIT is calculated using the formula given below

EBIT = Net Income + Interest Expense + Income Taxes

• EBIT = $59,531 Mn + $3,240 Mn + $13,372 Mn
• EBIT = $76,143 Mn

Average Total Assets is calculated using the formula given below

Average Total Assets = (Opening Total Assets + Closing Total Assets) / 2

• Average Total Assets = ($375,319 Mn + $365,725 Mn) / 2
• Average Total Assets = $370,522 Mn

Return on Total Assets is calculated using the formula given below

Return on Total Assets = EBIT / Average Total Assets

• Return on Total Assets = $76,143 Mn / $370,522 Mn
• Return on Total Assets = 20.55%

Therefore, Return on Total Assets for Apple Inc. stood at 20.55% for the year ending on September 29, 2018.

Explanation

The formula for Return on Total Assets can be derived by using the following steps:

Step 1: Firstly, calculate the net income of the company from its income statement. Next, figure out the interest expense incurred and corporate taxes paid during the year. Now, add the interest expense and tax to the net income to compute the EBIT of the company.

EBIT = Net Income + Interest Expense + Tax

Step 2: Next, determine the total assets of the company at the beginning and at the end of the current year. The total assets include both short term and long term assets for the period under consideration. Now, add both the values for total assets and divide by 2 to arrive at the average total assets.

Average Total Assets = (Opening Total Assets + Closing Total Assets) / 2

Step 3: Finally, the formula for Return on Total Assets can be derived by diving the company’s EBIT (step 1) by its average total assets (step 2) as shown below.

Return on Total Assets = EBIT / Average Total Assets

Relevance and Uses of Return on Total Assets Formula

It is one of the important profitability metrics that allows an analyst to assess the effectiveness of a company in its asset utilization. Typically, a higher value of Return on Total Assets indicates favorable healthy asset utilization to produce greater earnings which eventually attracts the investors. Inherently, a positive ratio signifies an upward trend for profit.

The ratio can be used in the comparison of different companies of the same scale and in the similar industry. However, comparison among companies from different industries is meaningless as the asset utilization usually varies significantly across industries.

Return on Total Assets Formula Calculator

You can use the following Return on Total Assets Calculator

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