Return on Assets (ROA) Ratio

Return on Assets (ROA) ratio is used to measure the amount of profit a company made for each $1 of assets owned. It is also known as Return on Total Assets (ROTA).

Formula:
Return on Assets = Net Income / Average Total Assets
Or,
ROA = Net Profit Margin * Asset Turnover

Example 1:
AUT Ltd has $40,000 of net income after tax for the year ended 31 December 2010. During the same period its total assets averaged $2,000,000. Then, the Return on Assets ratio = 40,000 / 2,000,000 = 2%

Example 2:
Calculate the ROTA, given the following data:
Net profit $68,000
Total sales $220,00
Sales returns $20,000
Total assets (31 Dec 2009): $160,000
Total assets (31 Dec 2010): $100,000

Solution:
Net Sales = 220,000 - 20,000 = $200,000
Net Profit Margin = (Net profit / Net sales) * 100% = (68,000 / 200,000) * 100% = 34% (or 0.34)
Average Total Assets = (160,000 + 100,000) / 2 = $130,000
Assets Turnover Ratio = Net Sales / Average Total Assets = 200,000 / 130,000 = 1.54

ROTA = Net Profit Margin * Asset Turnover = 0.34 * 1.54 = 0.5236 (or 52.36%)

* Next: Debt to Asset Ratio Formula & Example

Author

Kelvin Wong Loke Yuen is an experienced writer with a strong background in finance, specializing in the creation of informative and engaging content on topics such as investment strategies, financial ratio analysis, and more. With years of experience in both financial writing and education, Kelvin is adept at translating complex financial concepts into clear, accessible language for a wide range of audiences. Follow him on: LinkedIn.

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