Return on Average Assets (ROAA): Definition and How It's Used

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Updated March 28, 2022

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What Is Return on Average Assets (ROAA)?

Return on average assets (ROAA) is an indicator used to assess the profitability of a firm's assets, and it is most often used by banks and other 澳洲幸运5官方开奖结果体彩网:financial institutions as a means to gauge financial performance. Sometimes, ROAA is used interchangeably with 澳洲幸运5官方开奖结果体彩网:return on assets (ROA) al𒁃th✱ough the latter often uses current assets instead of average assets.

Key Takeaways

Return on average assets (ROAA) shows how well a company uses its assets to generate profits and works best when comparing to similar companies in the same industry.
ROAA formula uses average assets to capture any significant changes in asset balances over the period being analyzed.
Companies that invest heavily upfront into equipment and other assets typically have a lower ROAA.

Understanding Return on Average Assets (ROAA)

Return on average assets (ROAA) shows how efficiently a company is utilizing its assets and is also useful when assessing peer companies in the same industry. Unlike 澳洲幸运5官方开奖结果体彩网:return on equity, which measures the return on invested and retained dollars, ROAA measures the return🍌 on the assets purchased using those dollars.

The ROAA result variesℱ greatly depending on the type of industry, and companies that invest a large amount of money up f🐻ront into equipment and other assets will have a lower ROAA. A ratio result of 5% or better is generally considered good.

The ratio shows how well a firm's assets are being used to generate profits. ROAA is calculated by taking 澳洲幸运5官方开奖结果体彩网:net income and dividing it by average total assets♕. The final ratio is expressed as a percentage of total average assets. The formula is:

$\begin{aligned} &ROAA=\frac{\text{Net Income}}{\text{Average Total Assets}}\\ &\textbf{where:}\\ &\text{Net Income} = \text{Net income for the same period as assets}\\ &\text{Average Assets} = (\text{Beginning} + \text{Ending Assets}) / 2 \end{aligned}$

Net income is found on the 澳洲幸运5官方开奖结果体彩网:income statement, which provides an overview of a company's performance during a given time period. Analysts can look to the 澳洲幸运5官方开奖结果体彩网:balance sheet to f🎀ind assets. Unlike the income statement, which shows growing balances through the year, the balance sheet is only a snapshot in time. It does not provide an overview of changes made over a certain time p🅺eriod, but at the end of the time period.

To arrive at a more accurate measure of 澳洲幸运5官方开奖结果体彩网:return on assets, analysts like to take the average of the asset balances from the beginning and end of the same period that was used to define net income.

Tip

Analysts often use average assets because it takes into consideration balance fluctuations throughout the year🥃 and ꧂provides a more accurate measure of asset efficiency over a given time period.

ROAA Example

Assume that Company A has $1,000 in net income at the end of Year 2. An analyst will take the asset balance from the firm's balance sheet at the end of Year 1, and average it with the assets at the end of Year 2 for the ROAA calculation.

The firm's assets at the end of Year 1 are $5,000, and they increase to $15,000 by the end of Year 2. The average assets between Year 1 and Year 2 is ($5,000+$15,000)/2 = $10,000. The ROAA is then calculated by taking the company's $1,000 net income and dividing it by $10,000 to arrive at the answer of 10%.

If the return on assets is calculated using assets from only the end of Year 1, the return𓆏 is 20%, because the company is making more income on fewer assets. However, if the analyst calculates return on assets using only the assets measured at the en🅷d of Year 2, the answer is 6%, because the company is making less income with more assets.

How does ROAA differ from ROA?

If return on assets (ROA) uses average assets, then ROA and ROAA will be identical. If, however, an analyst uses only beginning or ending assets (as opposed to the average), then ROAA will provide a more accurate picture since aver❀age assets will smooth out changes or volatility in assets over an accounting period.

What are average assets?

A company's balance sheet will often report the average level or value of assets held over an accounting period, such as a quarter or fiscal year. It is often calculated as beginning assets less ending assets divided by two. This is done because on any given day, a firm's actual level of assets will fluctuate in the course of doing business. The average, therefore, provides a better metric.

How does ROAA differ return on total assets (ROTA)?

ROAA is similar to ROTA, however ROAA uses net income in the numerator, whereas ROTA uses EBIT (earnings before income and taxes) in the numerator🍃. Both use average total assets in the denominator.

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