Return on Assets
According to most financial gurus, a fundamental rule for getting rich in life is accumulating more Assets than Liabilities.
The same rule applies to a business.
The more assets a business has, the better.
But a sharp business owner isn't just concerned with the number of Assets - they also want to know the Return the Assets are producing.
Knowing the Return on Assets (ROA) helps to understand if the Assets are being used optimally, are overperforming or underperforming?
How do we calculate Return on Assets?
Return on Assets (ROA) is calculated by taking the Net Income produced by the Business and dividing it by the Total Assets.
ROA = Net Income / Total Assets.
The Net Income can be taken from the Income Statement and the Total Assets figure can be taken from the Balance Sheet.
The ROA is expressed as a percentage.
The ROA is a best used when it compares a period of time rather than in isolation.
For example, if a businesses ROA has grown from 18% to 22% over a two year period, the company is improving its utilization of Assets.
Additional insights can be gained if a business owner knows the typical ROA in his or her industry.
ROA's vary significantly from industry to industry so make sure to compare the ROA's within the same industry for the most relevant results.
The content provided on accountingsuperpowers.com and accompanying courses is intended for educational and informational purposes only to help business owners understand general accounting issues. The content is not intended as advice for a specific accounting situation or as a substitute for professional advice from a licensed CPA. Accounting practices, tax laws, and regulations vary from jurisdiction to jurisdiction, so speak with a local accounting professional regarding your business. Reliance on any information provided on this site or courses is solely at your own risk.
Tax and accounting rules and information change regularly. Therefore, the information available via this website and courses should not be considered current, complete or exhaustive, nor should you rely on such information for a particular course of conduct for an accounting or tax scenario. While the concepts discussed herein are intended to help business owners understand general accounting concepts, always speak with a CPA regarding your particular financial situation. The answer to certain tax and accounting issues is often highly dependent on the fact situation presented and your overall financial status.