Return on Assets: Definition, Formula & Example

Return on Assets: Definition, Formula & Example
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  • 0:00 What Are Return on Assets?
  • 0:58 Net Income as the Numerator
  • 1:31 Total Assets as the…
  • 2:10 An Example
  • 2:44 Lesson Summary
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Lesson Transcript
Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

In this lesson, we'll discuss return on assets (ROA). You'll learn to calculate ROA using net income and total assets. You'll also discover how to provide an accurate analysis of the calculation.

What Are Return on Assets?

You're an employee working in the accounting department for JLK Industries, a bottled water company. The company has a new CEO, who called a meeting today to discuss the company's financial position. He starts by noting that JLK Industries' net income has remained the same, and that the company poorly utilizes its assets. 'Overall, our return on assets is low,' he says. 'Who can explain this concept?

You raise your hand and tell him that return on assets is calculated by taking net income and dividing it by total assets. 'The results show how well we'll be able to use our assets to generate net income,' you explain. He tells you, 'great job!' And then asks you to write a report on JLK's return on assets to present to the rest of the company.

For the remainder of this lesson, we'll discuss the information you'll need to include in that report, such as net income and total assets.

Net Income as the Numerator

To calculate return on assets, we divide net income by total assets. So, the formula would be ROA = net income / total assets.

Net income, which is the numerator in our ROA equation, is a company's total revenue minus its expenses, such as business costs, depreciation, interest, and taxes. We use net income because it's a company's bottom-line number, meaning it's the final representation of profitability. You can find a company's net income on its income statement.

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