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 on Asset = Net Profit / Total Assets
Where,
  • Net Profit = Profit after Excluding all Expenses and Tax = Net Sales – (Cost of Goods Sold + Operating Expenses + Depreciation /Amortization + Interest Expenses + Tax paid)
  • 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%
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