Alright, let's discuss another ratio here, the return on assets. So, return on assets is a really common ratio used and I would expect you to have to know it. This measures the income a company earns based on the amount of assets it has to maintain. So, you can imagine, it's better to earn the same amount of money using fewer assets than more assets, right? That should make sense. If we can make $1,000,000 using just $1,000,000 worth of assets, well, that sounds better than having to make that same $1,000,000 while holding $10,000,000 or $100,000,000 of assets, right? The fewer resources we need to make the same amount of money, the better, right? So, ROA, it's a common profitability ratio but it's also an efficiency ratio. How efficient are we with our assets? It kind of helps us measure both of those there. Alright? So, return on assets. We generally, you're gonna hear it as ROA. This very common acronym for return on assets is ROA. So, this is how we do it here. We've got net income in our numerator and average total assets in the denominator. Remember, average, whenever we've got an average amount in any of our ratios, well, we're gonna take the beginning balance of that amount and the ending balance and divide it by 2. That's how we're always gonna do it for any average balance. Beginning balance plus ending balance divided by 2. Okay? And remember, not every question is going to give you a beginning and ending balance. If they just give you one balance, well, just use that number. If they don't give you two years of balance sheets that show you total assets last year, total assets this year, well, just use the number they gave you. You don't have to calculate an average in this case. And one more note here with return on assets, well, it's generally shown as a percentage. So, remember, this is always gonna give you a decimal when you do your calculation here. So, multiply by 100, move the decimal place two places and you'll be in percentage mode. Alright? So let's go ahead and discuss how do we analyze a return on assets ratio. Remember that this return on assets, what's it showing us? Well, it's showing us how much of the numerator for each unit of the denominator. So, how much net income does the company get for each dollar of assets, right? So for each dollar of assets we hold, how much net income do we get out of that? Okay. Different industries, you can imagine, are going to have different return on assets. There's going to be some industries that are heavily reliant on having a lot of assets. Think of something like an airline industry, right? Where they have to have airplanes that cost millions of dollars and they're going to have tons of assets. Whereas, there might be companies that have way fewer assets; a lot of tech companies might not have to have tons of assets to make their money. So, you're going to have to compare when you do this. We're going to use, like we've done with a lot of ratios, what's called benchmarking. So, we want to compare to our competitors and see how our ROA compares to our competitors or an industry average. That's how we're going to really be able to tell how we're doing. Cool? So, a red flag; the only way we're going to get a negative ROA, well, we couldn't have a negative denominator, right? There's no way to have negative assets, but we could have negative income, we could have a net loss. So, negative ROA, well, that lets us know that the company had a net loss and generally, those aren't good things, right? We want to be making money, not losing money. So that's pretty much it for ROA. It's not the most complicated ratio. So why don't we go ahead and just jump into some practice and you guys try and calculate some ROA. Cool? Let's do that now.

- 1. Introduction to Accounting1h 21m
- 2. Transaction Analysis1h 13m
- 3. Accrual Accounting Concepts2h 38m
- Accrual Accounting vs. Cash Basis Accounting10m
- Revenue Recognition and Expense Recognition24m
- Introduction to Adjusting Journal Entries and Prepaid Expenses36m
- Adjusting Entries: Supplies12m
- Adjusting Entries: Unearned Revenue11m
- Adjusting Entries: Accrued Expenses12m
- Adjusting Entries: Accrued Revenues6m
- Adjusting Entries: Depreciation16m
- Summary of Adjusting Entries7m
- Unadjusted vs Adjusted Trial Balance6m
- Closing Entries10m
- Post-Closing Trial Balance2m

- 4. Merchandising Operations2h 30m
- Service Company vs. Merchandising Company10m
- Net Sales28m
- Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory9m
- Perpetual Inventory - Purchases10m
- Perpetual Inventory - Freight Costs9m
- Perpetual Inventory - Purchase Discounts11m
- Perpetual Inventory - Purchasing Summary6m
- Periodic Inventory - Purchases14m
- Periodic Inventory - Freight Costs7m
- Periodic Inventory - Purchase Discounts10m
- Periodic Inventory - Purchasing Summary6m
- Single-step Income Statement4m
- Multi-step Income Statement17m
- Comprehensive Income2m

- 5. Inventory1h 55m
- Merchandising Company vs. Manufacturing Company6m
- Physical Inventory Count, Ownership of Goods, and Consigned Goods10m
- Specific Identification7m
- Periodic Inventory - FIFO, LIFO, and Average Cost23m
- Perpetual Inventory - FIFO, LIFO, and Average Cost31m
- Financial Statement Effects of Inventory Costing Methods10m
- Lower of Cost or Market11m
- Inventory Errors14m

- 6. Internal Controls and Reporting Cash1h 16m
- 7. Receivables and Investments3h 8m
- Types of Receivables8m
- Net Accounts Receivable: Direct Write-off Method5m
- Net Accounts Receivable: Allowance for Doubtful Accounts13m
- Net Accounts Receivable: Percentage of Sales Method9m
- Net Accounts Receivable: Aging of Receivables Method11m
- Notes Receivable25m
- Introduction to Investments in Securities13m
- Trading Securities31m
- Available-for-Sale (AFS) Securities26m
- Held-to-Maturity (HTM) Securities17m
- Equity Method25m

- 8. Long Lived Assets5h 1m
- Initial Cost of Long Lived Assets42m
- Basket (Lump-sum) Purchases13m
- Ordinary Repairs vs. Capital Improvements10m
- Depreciation: Straight Line32m
- Depreciation: Declining Balance29m
- Depreciation: Units-of-Activity28m
- Depreciation: Summary of Main Methods8m
- Depreciation for Partial Years13m
- Retirement of Plant Assets (No Proceeds)14m
- Sale of Plant Assets18m
- Change in Estimate: Depreciation21m
- Intangible Assets and Amortization17m
- Natural Resources and Depletion16m
- Asset Impairments16m
- Exchange for Similar Assets16m

- 9. Current Liabilities2h 19m
- 10. Time Value of Money1h 23m
- 11. Long Term Liabilities2h 45m
- 12. Stockholders' Equity2h 15m
- Characteristics of a Corporation17m
- Shares Authorized, Issued, and Outstanding9m
- Issuing Par Value Stock12m
- Issuing No Par Value Stock5m
- Issuing Common Stock for Assets or Services8m
- Retained Earnings14m
- Retained Earnings: Prior Period Adjustments9m
- Preferred Stock11m
- Treasury Stock9m
- Dividends and Dividend Preferences17m
- Stock Dividends10m
- Stock Splits9m

- 13. Statement of Cash Flows2h 24m
- 14. Financial Statement Analysis5h 25m
- Horizontal Analysis14m
- Vertical Analysis23m
- Common-sized Statements5m
- Trend Percentages7m
- Discontinued Operations and Extraordinary Items6m
- Introduction to Ratios8m
- Ratios: Earnings Per Share (EPS)10m
- Ratios: Working Capital and the Current Ratio14m
- Ratios: Quick (Acid Test) Ratio12m
- Ratios: Gross Profit Rate9m
- Ratios: Profit Margin7m
- Ratios: Quality of Earnings Ratio8m
- Ratios: Inventory Turnover10m
- Ratios: Average Days in Inventory9m
- Ratios: Accounts Receivable (AR) Turnover9m
- Ratios: Average Collection Period (Days Sales Outstanding)8m
- Ratios: Return on Assets (ROA)8m
- Ratios: Total Asset Turnover5m
- Ratios: Fixed Asset Turnover5m
- Ratios: Profit Margin x Asset Turnover = Return On Assets9m
- Ratios: Accounts Payable Turnover6m
- Ratios: Days Payable Outstanding (DPO)8m
- Ratios: Times Interest Earned (TIE)7m
- Ratios: Debt to Asset Ratio5m
- Ratios: Debt to Equity Ratio5m
- Ratios: Payout Ratio5m
- Ratios: Dividend Yield Ratio7m
- Ratios: Return on Equity (ROE)10m
- Ratios: DuPont Model for Return on Equity (ROE)20m
- Ratios: Free Cash Flow10m
- Ratios: Price-Earnings Ratio (PE Ratio)7m
- Ratios: Book Value per Share of Common Stock7m
- Ratios: Cash to Monthly Cash Expenses8m
- Ratios: Cash Return on Assets7m
- Ratios: Economic Return from Investing6m
- Ratios: Capital Acquisition Ratio6m

- 15. GAAP vs IFRS56m
- GAAP vs. IFRS: Introduction7m
- GAAP vs. IFRS: Classified Balance Sheet6m
- GAAP vs. IFRS: Recording Differences4m
- GAAP vs. IFRS: Adjusting Entries4m
- GAAP vs. IFRS: Merchandising3m
- GAAP vs. IFRS: Inventory3m
- GAAP vs. IFRS: Fraud, Internal Controls, and Cash3m
- GAAP vs. IFRS: Receivables2m
- GAAP vs. IFRS: Long Lived Assets5m
- GAAP vs. IFRS: Liabilities3m
- GAAP vs. IFRS: Stockholders' Equity3m
- GAAP vs. IFRS: Statement of Cash Flows5m
- GAAP vs. IFRS: Analysis and Income Statement Presentation5m

# Ratios: Return on Assets (ROA) - Online Tutor, Practice Problems & Exam Prep

Return on Assets (ROA) is a key profitability and efficiency ratio that measures a company's net income relative to its average total assets. The formula is ROA=Net IncomeAverage Total Assets. A higher ROA indicates better asset efficiency, with variations across industries. Negative ROA signals a net loss, which is undesirable. Benchmarking against competitors helps assess performance, emphasizing the importance of asset management in financial accounting and the accounting cycle.

### Ratios: Return on Assets (ROA)

#### Video transcript

XYZ Company had net sales during the period of $380,000 and net income of $60,000. If total assets were $480,000 at the beginning of the period and $720,000 at the end of the period, what is the company's ROA?

A company has income before taxes of $100,000. Net sales are $400,000 and gross profit is $300,000. What is the ROA, assuming the company has a 40% tax rate, and average total assets were $900,000?

### Here’s what students ask on this topic:

What is the formula for calculating Return on Assets (ROA)?

The formula for calculating Return on Assets (ROA) is:

$\frac{\mathrm{Net}\mathrm{Income}}{\mathrm{Average}\mathrm{Total}\mathrm{Assets}}$

This ratio measures a company's net income relative to its average total assets, indicating how efficiently the company is using its assets to generate profit.

Why is Return on Assets (ROA) important in financial analysis?

Return on Assets (ROA) is important because it provides insight into a company's profitability and efficiency. A higher ROA indicates that the company is effectively using its assets to generate income. It helps investors and analysts compare the performance of companies within the same industry, as different industries have varying asset requirements. Additionally, ROA can signal potential issues if it is negative, indicating a net loss.

How do you calculate the average total assets for the ROA formula?

To calculate the average total assets for the ROA formula, you take the beginning balance of total assets and the ending balance of total assets, add them together, and then divide by 2. The formula is:

$\frac{(\mathrm{Beginning}\mathrm{Balance}+\mathrm{Ending}\mathrm{Balance})}{2}$

If only one balance is provided, use that number directly.

What does a negative ROA indicate about a company's financial performance?

A negative ROA indicates that a company has a net loss, meaning its net income is negative. This is generally a red flag, as it suggests the company is not generating enough income to cover its asset costs. Negative ROA can be a sign of poor financial health and inefficiency in asset management.

How does industry type affect the interpretation of ROA?

Industry type significantly affects the interpretation of ROA because different industries have varying asset requirements. For example, asset-heavy industries like airlines require substantial investments in assets, leading to lower ROA compared to asset-light industries like tech companies. Therefore, it's crucial to benchmark ROA against industry averages or competitors to get a meaningful assessment of a company's performance.