Here’s How You Can Calculate Return On Asset (ROA)

Sooner or later, startups will need to invest in items of value. These are objects that bring value to a company, and they’re termed “assets” in everyday business parlance. Figuring out the return on these items helps financial analysts and business owners determine how profitable their businesses are.

Keep reading to explore the impact of ROA and how to calculate your return on assets.

What Is ROA?

Before we learn how to calculate ROA, we must first build a thorough understanding of what this term means for your business.

Items of value, be they property, technology, machinery, equipment, or tools, can be filtered into two major categories. The first consists of those items that are concrete, otherwise known as tangible assets. The second type is those that can’t be touched, generally known as intangible assets.

Comparing a business’s net income with its total number of investments gives crucial insight into its profitability. The ROA calculation consists of a percentage that tells the financial experts and accountants whether these items are being well-managed.

A return on these objects varies depending on the industry in question. As a ROA example, consider the following sectors:

ROA Vs. ROE

In businesses, the acronym ROE (return on equity) is just about as widely used as ROA. In a way, both serve similar functions. Each metric lends insights into a company’s capital manageability and profitability.

The main difference between these terms revolves around what items are being compared against the net income. With the return on equity, financial experts only take into account the equity and not the liabilities. 

Experts take both the return on equity and assets into consideration when painting a complete financial picture. 

How Do I Find The Return On Assets?

Luckily, the return on assets equation is relatively straightforward.

The bottom of your income statement usually specifies the net income. This figure represents the total amount of profit generated by a company after deducting the expenses.

To calculate the return on investments, divide your net income by the total assets owned. Refer to your company’s balance sheet to determine this sum. 

Here’s how to calculate the rate of return on assets:

ROA Equation = (Net Income / Total Assets) * 100

Return On Investments Example

Let’s say you belong to the retail industry, which has an average investment return of 7.20%.

To get a sense of where your company stands relative to comparable benchmarks, you must calculate the figure. Assuming that your net income is $7,000 and your total assets amount to $60,000, your return on investments would equal a modest 11.66%, which is well above the industry average.

Why ROA Is So Important?

By applying the ROA formula, financial experts, business owners, and accountants derive vital insights into asset manageability. The greater the percentage return on investment, the better the management.

Businesses typically make use of this statistic to ascertain the degree of competition. Having a higher or lower return rate than the industry average lets you know whether your capital management needs reevaluation.

Moreover, knowing how to find your ROA and keeping tabs on it can deliver the following benefits:

• If you have a good return on investment, you can attract more investors 
• You can assess the competition
• Take steps to improve overall business performance

As stated earlier, your company’s financial picture remains incomplete until you assess the returns on assets and equity. 

The Bottom Line

Knowing how to calculate ROA keeps you abreast of your business’s needs as well as its efficiency relative to the competition. To achieve greater manageability, small business owners must routinely check these numbers and act accordingly. Financial experts and accountants can make the most of this information to help businesses attract investments or identify areas for a significant improvement.