Roaa definition

Ebony Howard is a certified public accountant & credentialed tax expert. She has been in the accounting, audit, & tax profession for more than 13 years.

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What Is the Return on Average Assets – ROAA?

Return on average assets (ROAA) is an indicator used khổng lồ assess the profitability of a firm"s assets, và it is most often used by banks and other financial institutions as a means lớn gauge financial performance. It is also known as simply return on assets (ROA).

The ratio shows how well a firm"s assets are being used to generate profits. ROAA is calculated by taking net income và dividing it by average total assets. The final ratio is expressed as a percentage of total average assets.

The Formula for Return on Average Assets Is

ROAA=NetIncomeAverageTotalAssetswhere:NetIncome=Netincomeforthesameperiodasassetseginaligned &ROAA=frac extNet Income extAverage Total Assets\ & extbfwhere:\ & extNet Income = extNet income for the same period as assets\ & extAverage Assets = ( extBeginning + extEnding Assets) / 2 endaligned​ROAA=AverageTotalAssetsNetIncome​where:NetIncome=Netincomeforthesameperiodasassets​

How to lớn Calculate Return on Average Assets – ROAA

ROAA is calculated by dividing net income by average total assets. Net income is foundon the income statement, whichprovides an overview of a company"sperformance during a given time period.Analysts can look to the balance sheet lớn find assets.

Unlượt thích 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 period, but at the end of the time period.

To arrive sầu at a more accurate measure of return on assets, analysts lượt thích lớn take the average of the asphối balances from the beginning và kết thúc of the same period that was used to define net income.

What Does ROAA Tell You?

Return on average assets (ROAA) shows how efficiently a company is utilizing its assets & is also useful when assessing peer companies in the same industry. Unlike return on equity, which measures the return on invested và retained dollars, ROAA measures the return on the assets purchased using those dollars.

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

The ROAA shows how well a company uses its assets khổng lồ generate profits & works best when comparing lớn similar companies in the same industry.The formula uses abverage assets to lớn capture any significant changes in asset balances over the period being analyzed.Companies that invest heavily upfront into equipment & other assets typically have a lower ROAA.

Example of How khổng lồ Use ROAA

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

The firm"s assets at the over of Year 1 are $5,000,and they increase lớn $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 & dividingby $10,000 to lớn arrive at the answer of 10%.

If the return on assets is calculated using assets from only the end of Year 1, the return 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 end of Year 2, the answer is 6%, because the company is making less income with more assets.

Analysts use average assets for this reason because it takes inkhổng lồ consideration balance fluctuations throughout the year và provides a more accurate measure of asmix efficiency over a given time period.