What is the Return on Average Assets (ROAA) / Return on Assets (ROA) Ratio
The Return on Average Assets (ROAA) is similar of the Return on Assets (ROA) but a thin difference is that current value of assets is used to evaluate the ROA, and average value of assets is used to evaluate the ROAA. This ratio is used by every individual who analyze the company. Financial institutions and conservative investors often used ROAA for a company analysis.
The ROAA or ROA vary industry to industry that’s why companies of same industry should be compared. Current ROA of a company must also be compared with the previous ROA of that company for a company analysis. Generally, defensive industries are capital intensive, and they have large base of assets, that’s why will generally have lower ROAA or ROA, while tech companies may have a higher ROAA or ROA. ROAA ratio is used to measure the company’s profitability relative to company’s total average assets, to wit, how much profit company earns from its assets.
Return on Assets (ROA)
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What is an ideal ROAA or ROA
Generally, the ROAA or ROA of an oil & gas company will be lower than that of a technology company, that’s why, it is advised to compare the ROAA or ROA of a company with industry average and other companies of similar industry.
Return on Average Assets Formula &
Return on Assets Formula
Return on Average Assets (ROAA) % = [(Net income of a period X 100) ÷ Average assets of that particular period] %
Here, Average Assets = (Total amount of assets at the beginning of the period + Total amount of assets at the end of the period) ÷ 2Return on Assets (ROA) % = [(Net income of a period X 100) ÷ Current value of assets] %
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Understanding and Importance of ROA Ratio
A higher ROA is considered as company is good and more efficient to generate more profit relative to assets, to wit, company is efficiently converting its assets into profit. Company’s total assets comprise the total liabilities as well as total equity of shareholders. Company’s assets may be funded by debt or equity or both.
The ROAA or ROA is one of the key ratios used for company analysis but never make an investment only basis of a single ratio. It is advised that do in-depth analysis before making an investment decision. A company’s ROAA or ROA is lower than ROE of that company, as assets comprise both shareholder’s equity and liabilities then denominator of ROAA or ROA is higher than that of ROE.
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Use of ROAA and ROA
Investors, lenders, analysts, financial institutions and company’s management use ROAA or/and ROA to assess the company’s efficiency over a period of time against companies past performance, industry’s average and other companies of similar industry. Company’s management also use this ratio for internal control.
Return on Average Assets and Return on Assets Example
Let’s say Mr. X starts a printing business with some machineries worth total Investment of INR 10 lakh. During a year, he adds some more machineries worth total of INR 2 lakh. And, at the closing day of that year Mr. X calculates that he earned INR 1.00 lakh as net profit over a period of that year, therefore, according to aforementioned formula –
Return on Average Assets (ROAA) % = [(1,00,000 X 100) ÷ 6,00,000] % = 16.67%
Here, Average Assets = (10 lakh + 2 lakh) ÷ 2 = 6 lakhAnd, Return of Assets (ROA) % = [(1,00,000 X 100) ÷ 12,00,000] = 8.33%
Here, current assets are 12 lakhs, as Mr. X was purchased more machineries worth total of INR 2 lakh during a year, that’s why, 10 lakh + 2 lakh = 12 lakhs.
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