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,
$$Return\quad on\quad Asset=\frac { Net\quad Profit }{ Total\quad Assets } $$
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
Total Liability = Long Term Debts + Short Term Debts
⇨ Rs. 1500000.00
Total Asset = Total Equity + Total Liability
Total Asset = Total Equity + Total Liability
⇨ Rs. 6500000.00
Return on Asset = Net Profit / Total Asset
Return on Asset = Net Profit / Total Asset
⇨ 1000000 / 6500000
⇨ 2/13
Hence, Return on Asset (ROA) = 2/13 or 0.1538 or 15.38%
Hence, Return on Asset (ROA) = 2/13 or 0.1538 or 15.38%
