Over time, your small business acquires items of value. These things that bring value to your business are assets. To see how profitable your assets are, learn how to find return on assets and its impact on your business. So, what is return on assets?
What is return on assets?
An asset can be tangible (things you can touch) or intangible (things you can’t touch). Examples of assets include property, like cars, machinery, patents, or logos.
Your return on assets, or ROA, indicates how profitable your business is by comparing net income with your total assets.
ROA can give you, investors, or financial analysts an idea of how well your company manages its assets. Your return on assets is a percentage.
Keep in mind when comparing return on assets that it varies by industry. One type of industry may have a different ROA range than another.
Here’s a breakdown of some common industries along with their average ROAs:
What is a good ROA? Generally, the higher the return on assets ratio, the better. Compare your ROA to others in the same industry to see how your business ranks.
Return on assets vs. return on equity
You have likely heard about return on equity (ROE) before. Both ROA and ROE measure how well your business utilizes certain resources.
ROE only measures your business’s return on equity, not including liabilities. And, ROA accounts for debt, while ROE does not.
While their purposes are similar, ROE and ROA calculate different information about your business. To measure your business’s financial performance, calculate both ROA and ROE.
How to calculate ROA
Now that you know what is ROA, it’s time to learn how to calculate return on assets. Return on total assets is simple to compute. You can find ROA by dividing your business’s net income by your total assets.
Total assets are your company’s liabilities plus your equity. You can find your total assets on your business balance sheet.
To calculate ROA, use the following return on assets formula:
ROA = Net Income / Total Assets
ROA calculation example
Using the handy ROA formula from above, let’s take a look at an example of computing ROA.
Say your business is in the technology industry, and the average ROA is 14.50%. Your business, ABC Company, has a net income of $10,000. Your total assets equal $65,000.
ROA = Net Income / Total Assets
15.38% = $10,000 / $65,000
Your ROA is 15.38%, which is slightly above the industry average of 14.50%.
If you want to increase your ROA, your net income and total assets must increase to equal similar values.
For example, if your net income increases to $30,000 and your total assets remain the same at $65,000, your ROA percentage would increase to 46.15%.
Importance of ROA
Your ROA percentage indicates how well your business manages its balance sheet to generate profits. And, looking at your ROA and comparing it to others can help you determine where you stand.
Measuring ROA has many advantages, such as:
- Giving investors an idea of how well your business converts money into income
- Comparing your average to your competitors in the same industry
- Helping improve future business performance (e.g., increasing profits)
Need an easy way to track your business transactions? Patriot Software lets you streamline your accounting process so you can get back to your business. What are you waiting for? Get started with your self-guided demo today!
Like what you read? Let’s connect, friend! Like us on Facebook and let’s get talking.
This is not intended as legal advice; for more information, please click here.