How Return on Assets can Influence the Earning Potential of a Business

Return on Assets = Net Profit margin × Asset Turnover Ratio

Return on assets formula, at times also known as ROA, justgives an overview of an entity’s total revenue divided by its total assets. Inother words, the return on assets gives a chance to investor or analysts tohave a look at the capability of a company to utilize its assets for generatinga profit.

In the numerator, the Net Income within return of assetformula can be found income statement of an entity. Moreover, net income is theamount earned by an organization in the wake of subtracting out the costs incurred,including depreciation and all other indirect expenses.

On the other side average total assets in the denominator of return on assets equation can be found from an entity’s balance sheet. You will calculate the average total assets of the period you are evaluating to use in this formula. For instance, if an analyst is trying to get the return on assets for a company then he will use the total assets value at the start and end of the year to calculate the average balance.

Return on Assets

Asset turnover vs. Return on assets

The particular contrast between asset turnover and return onassets is that the asset turnover considers revenues while the return on assetsconsiders net income. By utilizing net income in the formula the return onassets gives a look into the expenses of a company.

Furthermore, the asset turnover ratio can also be used tocalculate return on assets by using the following equation;

ROA = Net Profit margin × Asset Turnover Ratio

Here above the net profit margin will be calculated bydividing revenues to net income. While on the other side the asset turnover ratiois net income to total assets division. When you multiply both the revenues onboth equations will cancel out each other and the resultant will be the aboveformula.

Use of ROA formula

Typically return on assets formula can be utilized by afinancial analyst or by an organization to internally assess if it is makingenough profit relative to assets it is using. It is critical for a financial analystor investor to think about or evaluate the return on assets while comparing itwith other entities in the same industry. A specific organization may give anitem that requires extra asset for assembling or manufacturing the item withrespect to another industry.