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Computing and Interpreting Return on Assets

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  • 0:04 Return on Assets Defined
  • 0:45 ROA Computation
  • 1:59 Example Calculation
  • 2:40 ROA Interpretation
  • 3:16 Lesson Summary
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Lesson Transcript
Instructor: Rebekiah Hill

Rebekiah has taught college accounting and has a master's in both management and business.

There are a number of ratios that can be calculated by information found on the financial statements. In this lesson, you will learn about return on assets.

Return on Assets Defined

Have you ever wondered what all the hoopla is about financial statements? Sure, they tell companies just how well they are doing, and they tell other people who are interested just how well a company is handling business operations, but how do they do that? The answer is that the financial statements provide the numbers needed to calculate specific ratios. One of those ratios is return on assets. What exactly is return on assets?

Return on Assets is a financial statement ratio that measures how well a company uses its assets to generate revenue. This ratio is usually abbreviated as ROA, and it's a measure of profitability.

ROA Computation

Wasabi International
Income Statement
For the period ending December 31, 2013
Revenues
Sales $856,000.00
Expenses
Wages Expense $382,000.00
Supplies Expense $184,800.00
Utilities Expense $120,000.00
Interest Expense $15,000.00
Total Expenses $701,800.00
Net Income $154,200.00

WASABI INTERNATIONAL Balance Sheet 31-Dec-13
Assets Liabilities
Current Assets Current Liabilities
Cash $100,000.00 Accounts Payable $140,000.00
Accounts Receivable $75,000.00 Salaries Payable $50,000.00
Inventories $200,000.00 Interest Payable $15,000.00
Prepaid Insurance $25,000.00 Taxes Payable $5,000.00
Total Current Assets $400,000.00 Total Current Liabilities $210,000.00
Noncurrent Assets Long-term Liabilities
Property, Plant & Equipment Notes Payable $60,000.00
Land $25,000.00 Bank Loan $65,000.00
Building & Equipment $150,000.00 Total Liabilities $125,000.00
Stockholder's Equity
Capital Stock $100,000.00 (150,000 shares outstanding)
Retained Earnings $140,000.00
Total Stockholder's Equity $240,000.00
Total Assets $575,000.00 Total Liabilities & Stockholder's Equity $575,000.00

Now, in order to calculate ROA, you will need figures from two of the financial statements. The first figure you will need comes from the income statement. The income statement is the first financial statement generated and tells how much money a company made or lost in a given time period. The figure that you are looking for on the income statement that is used in calculating ROA is net income. Net income is found on the very last line of the income statement.

The second figure that you need when calculating ROA comes from the balance sheet. The balance sheet is the third financial statement generated and lists all the accounts that a company has as well as their balances. The number that you need from the balance sheet to calculate ROA is the dollar amount of total assets. This number is the last number found on the left side of the balance sheet.

Once you have both the numbers that are required in the ROA formula, you simply divide the net income by the total assets. The formula, when written, looks just like this:

ROA = NET INCOME / TOTAL ASSETS

Example Calculation

Look at the balance sheet and income statement from Wasabi International.

The company has net income of $154,200 that appears on the income statement. The total assets from the balance sheet are $575,000. If we substitute these numbers into the ROA formula we get this:

ROA= $154,200 / $575,000

So the ROA = 0.27

So the return on assets for Wasabi International is 27%.

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