What Is Return On Assets?
Definition of Return on Assets
- The return on assets focuses on how profitable a company is in relation to its total assets.
- The ratio is always presented in the form of a percentage.
- The higher the ratio, the more efficient and productive a company is.
What is the Formula for Return on Assets?
- The return on assets can be calculated by dividing the net income by the average assets.
Net income ÷ Average assets
- The average total assets can be calculated by adding the beginning and ending total assets and dividing them by 2.
Return on Assets in Practice
- Harvey’s law firm generates $5,000,000 each year. However, Harvey has to pay $1,200,000 to his partners and employees, $400,000 to utilities, and $300,000 for rent.
- Harvey’s law firm starts the year with $10,000,000 in assets and ends the year with $9,300,000 in assets. What is the return on assets for the law firm?
- 5,000,000 – 1,200,000 – 400,000 – 300,000 = $3,100,000
- (10,000,000 + 9,300,000) ÷ 2 = $9,650,000
- 3,100,000 ÷ 9,650,000 = 0.321
- 0.32 x 100 = 32%
- Therefore, for every dollar assets, Harvey’s law firm invests in will generate 32 cents for the law firm.