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
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