ROA Calculator

Understanding Return on Assets

ROA is a useful performance metric for analyzing a company's efficiency in utilizing its assets. In short, it's the ratio of a company's net income to its total assets. It is usually expressed as a percentage value. The higher the ROA, the better company uses its resources to generate profits. 

When to use our Return on Assets calculator:

ROA is a very similar indicator to Return on Equity - the main difference is in how both indicators treat debt. While ROE leaves out the company's liabilities, ROA considers all debt. So for businesses that use debt extensively as leverage, Return on Assets is a better gauge than Return on Equity.

You can use the ROA calculator:

To determine profitability

Using the ROA indicator, you can quickly check how much income a company generates from its assets. Companies with negative Return on Assets generate losses. 

To determine efficiency

Thanks to our calculator, you can quickly calculate how successful a particular company is in generating profits. A high return on assets clearly shows that the company is under good management. 

To benchmark companies

The simplicity of this gauge allows you to quickly compare different companies. While doing so, you must remember to analyze companies in the same industry because companies from different market segments may have utterly other asset structures.

To compare periods

Return on Assets is the best method of analyzing how a company's efficiency changes over time. Since the structure of resources is similar, such a comparison can get precise information on whether the company is heading in the right direction. 

To identify asset-intensive companies.

Low values of ROA are a clear sign that a particular company is either not utilizing resources at its disposal efficiently or is extensively using debt.

When not to use

Since ROA percentage value is highly dependent on the company's assets, it should not be used for comparing firms with different resource structures. For example, companies from various industries. 

ROA summary

• Return on assets is a company's net income ratio to its total assets.
• Assets include stakeholders' equity and total debt. 
• ROA is a clear indication of a company's efficiency in utilizing resources.
• Businesses from different markets should not be compared using this profitability ratio.

How to calculate Return on Assets?

ROA formula

ROA = (net_income / total_assets) * 100%

Where:

• Net_income - the company's net profit in the analyzed period from the income statement.
• Total Assets - available resources (including equity and debt) from the balance sheet.

There are cases where average assets are put into the formula. In such case, average assets are calculated as follows:

Average_assets = (Assets_at_the_end - Assets_at_the_beginign) / 2 

Key takeaways from the ROA equation

• Return of Assets may take positive or negative values. Since the business may generate profit or loss. 
• If a company has no debt, ROA is equal to ROE. 
• For companies with debt, ROA is lower than ROE.

Definition of Total Assets

Total assets are the sum of all resources owned by a company, valued in monetary terms. These assets are classified into two main categories: current assets and non-current (or fixed) assets. Current assets include cash and cash equivalents, inventory, accounts receivable, and other assets that are expected to be converted into cash within a year.

Non-current assets, on the other hand, are long-term resources such as property, plant, and equipment (PP&E), intangible assets like patents and trademarks, and long-term investments. Understanding what constitutes total assets is crucial for accurately calculating the Return on Assets (ROA) ratio, as it provides a comprehensive view of the resources at a company's disposal for generating income.

What is a good return on assets?

One may say that as high as possible, but in practice, even 5% of ROA is a reasonable return rate for companies that are using debt as leverage. 

Much depends on the industry. Each industry characterizes its own cost structure; each has different competition. So many factors heavily impact possible returns on assets.

For example, a SaaS company may have a significantly higher ROA than a production company. 

Since the second may need open credit lines to ensure cash flow, while the first has stable MRR from recurring customers. 

For more information, you can check the average ROA by industry.

The advantages of ROA metric

Easy to use and understand

The simplicity of this financial ratio is one of the main reasons for the mass adoption of this indicator among financial analysts. A single percentage value given by the return on assets formula can provide many valuable pieces of information for an investor. 

A quick comparison of companies

ROA is the best way to benchmark companies from the same market niche. As long as the companies have similar asset structures, ROA can be very precise in determining which one is more efficient and has higher perspectives for growth.

The disadvantages of ROA

May be misleading

Life would be easier if one single factor could replace a complete fundamental investment analysis. Although ROA is handy, it should be considered one of many metrics to check before making crucial business decisions. 

Risk is not considered (volatility)

It's important to remember the ROA value is just a number, and a single number without proper context won't give you the correct answer. 

The company's performance may vary, and so may the costs. It applies primarily to companies highly leveraged on debt. During good market conditions, it's relatively easy to handle debt. While during a downturn, liabilities can be a burden with a very negative impact on profits.

Factors to consider when analyzing company's ROA

Impact of Depreciation

Depreciation plays a significant role in the calculation of ROA by affecting the value of a company’s total assets. Depreciation is the process of allocating the cost of tangible assets over their useful lives, reflecting the wear and tear, or obsolescence of physical assets like machinery, equipment, and buildings. As assets depreciate, their book value on the balance sheet decreases, which can increase the ROA ratio over time if net income remains constant or grows.

However, it’s important to note that depreciation is a non-cash expense and does not directly affect a company's cash flow. Therefore, understanding the impact of depreciation on total assets and, consequently, on the ROA ratio, is essential for a more accurate interpretation of a company's efficiency in using its assets to generate profits.

Influence of Accounting Practices

Accounting practices and policies can significantly influence the calculation of net income and total assets, impacting the comparability of ROA across companies. Different accounting methods, such as FIFO (First In, First Out) versus LIFO (Last In, First Out) for inventory valuation or various approaches to estimating depreciation, can lead to significant variations in reported net income and asset values.

Moreover, choices related to capitalizing versus expensing certain costs can affect the balance sheet's total assets and the income statement's net income. These variations underscore the importance of considering the accounting policies of different companies when comparing ROA ratios to ensure an apples-to-apples comparison.

Leverage Effect

Leverage, or the use of borrowed funds to finance the acquisition of assets, can have a profound effect on ROA. While leverage can amplify returns when a company earns more from its investments than the cost of debt, it can also reduce ROA if the cost of debt exceeds the income generated from the assets.

High leverage increases the total assets without a corresponding increase in equity, potentially leading to a lower ROA if the additional debt does not contribute to proportionately higher net income. Therefore, a high ROA driven by excessive debt use may be concerning, as it indicates that the company's profitability is reliant on borrowed funds rather than efficient asset utilization. Understanding the leverage effect is crucial for interpreting ROA in the context of a company's capital structure and risk profile (visit our Debt-To-Asset Calculator for more details).

Similar efficiency metrics

If you wish to analyze the performance of your investments, you may use one of many calculators available here on Calcopolis. For example, our ROS calculator can help you analyze the performance of your sales. 

The ROCE calculator lets you analyze how efficiently capital is utilized by the company.

The ROIC calculator is a handy tool for monitoring how well your capital is used by a particular company. 

For general use cases, you many use a simple ROI Calculator.

Authors

Created by Lucas Krysiak on 2022-04-13 15:36:46 | Last review by Mike Kozminsky on 2022-09-15 13:48:38