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Return on Assets Ratio

Simple Alliance, Kenya Limited


Definition

The Return on Assets (ROA) ratio is a business profitability ratio that evaluates the efficiency with which profits are being derived from a business’ assets.  Basically, the financial ratios measure the quantity of profits earned from each shilling worth of your business’ assets. It evaluates your business’ capacity to create profits prior to leverage through using the business’ assets. The ROA basically compares your average total assets with your net income. The return on assets ratio avoids using leverage arising from owner’s equity and from other debt obligations.   

Formula  

To compute your ROA, obtain your net income and your total asset figures from your latest balance sheet. Next, divide your net income figure with your total assets value.

Return on Assets Ratio = Net Income/ Total Assets

Functions

As important financial analysis ratios, the ROA undertakes several significant roles, including:

  • The return on assets ratio offers a standard for assessing how a business’ management efficiently uses the average shilling put into the business’ assets
  • It determines the income that you have been able to derive from your business’ assets
  • Being a major profitability measure, ROA can help to evaluate the relative efficiency of businesses which deal in similar service or product lines and which operate in the same industry
  • Potential and existing investors use the ROA to assess your business’ leadership

Principles

 A number of recognised standards guide the computation and use of the return on assets ratio. Some key principles include: 

  • The premise that a low return on assets ratio shows that profits are low for a business’ assets  
  • Looked at against industry ratios, a low return on assets ratio indicates that your business is inefficiently using its assets 
  • In general, a high ROA indicates that your business is highly effective in using its assets   
  • Some businesses, notably manufacturers and sellers of seasonal wares,  experience wide asset fluctuations between low and high seasons. To cater for such fluctuations, the assets figure used in calculating ROA is usually the average of the businesses’ assets at the start and end of the trading period    

Shortfalls of the ROA

The return on assets ratio is not valuable if you are comparing different sectors or businesses operating in different sectors. This is because two businesses could be within the same sector but deal in different services or products. For this reason, the ROA is most valuable when used as a historical benchmark. Your business could use this benchmark to evaluate its comparative performance across different time periods.    

A Convenient Aid

So as to help you calculate your ROA quickly, we have created an automatic return on assets calculator. The tool is in the below box labelled Return on Assets Calculator.

 

Return On Assets Calculator

Net Income

 


Click on the "?" next to the input box for an item to get help on that item.

Total Assets

 


Return On Assets Ratio

 



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Your Role

So as to make use of the return on assets calculator, you need to derive your net income and total assets figures from your most recent income statement and balance sheet.  To cater for fluctuations, calculate your average assets value by adding up the asset figures in your last and latest balance sheets and dividing the result by two.   Next, enter the asset, and net income values in the respective slots in the ROA calculator. Click on the Calculate button.

Your return on assets ratio, a business financial ratio, evaluates how much income you have made from every shilling worth of your business’ assets. This ratio evaluates your management efficiency. It helps potential and existing lenders to assess your leadership skills.  You arrive at the ROA value by dividing your net income value by average total assets. You can use the above return on assets ratio calculator to make your computation more efficient.

Copyright (C) 2016, Simple Alliance Kenya Limited

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