# Return on Asset (ROA) Ratio

Return on Asset is a type of Profitability Ratio that determines the Return on Total Assets in a Company. It measures the profitability of a Company relative to its Assets.
$$Return\quad on\quad Asset=\frac { Net\quad Profit }{ Total\quad Assets }$$
Net Profit = Profit after Excluding all Expenses and Tax = Net Sales – (Cost of Goods Sold + Operating Expenses + Depreciation /Amortization + Interest Expenses + Tax paid)Where,
• And Total Asset = Total Equity + Total Liability
• Return on Asset (ROA) multiplied by 100 provides the ROA in percentage terms.

## Significance and Interpretation

• Return on Asset tells the total earnings of a company with respect to the Total Capital of the company that includes Debt as well as Equities, other Ratio of Profitability do not consider both the types.
• A high ROA implies that the assets of the company are utilized in a productive manner to maximize the profits. A low ROA implies poor utilization of the assets of the company. Hence, a high ROA attracts investors.
• It must be noted that comparing the performance of two companies based on ROA is useful only if both companies belong to the same sector of the industry.

### Examples

#### Example 1:

Given below are few details of M/S XYZ Ltd., use them an calculate the Return on Asset for M/S XYZ Ltd.
Particulars Amount (in Rs.)
Equity Share Capital 4000000.00
Reserves and Surplus 1000000.00
Long Term Debts 500000.00
Short Term Debts 1000000.00
Net Profit 1000000.00

#### Solution:

Total Equity = Equity Share Capital + Reserves and Surplus
Rs. 5000000.00
Total Liability = Long Term Debts + Short Term Debts
⇨ Rs. 1500000.00
Total Asset = Total Equity + Total Liability
⇨  Rs. 6500000.00
Return on Asset = Net Profit / Total Asset
⇨  1000000 / 6500000
⇨  2/13
Hence, Return on Asset (ROA) = 2/13 or 0.1538 or 15.38% 