How to Calculate ROA (Return on Assets)

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This video shows how to calculate a company’s Return on Assets (ROA). It provides an example to show how ROA can be used to compare firms’ performance.

ROA is calculated by dividing a company’s Net Income by its Average Total Assets. You can compute the Average Total Assets by adding the company’s total assets from its most recent Balance Sheet date to its total assets from the previous year’s Balance Sheet date and dividing the sum by two. You use the Average Total Assets because you want to approximate the amount of assets the company had during the year (or quarter, month, etc.) during which the company generated the Net Income.

Examining ROA is important, because it measures how profitable a company is after taking into consideration its assets. To show why this matters, think about the following example: let’s say two entrepreneurs earned a profit of $1,000 in their first year of business. They might seem equally successfully because they earned the same profit, but what if one of the entrepreneurs began with just $50 in assets whereas the other entrepreneur started out with $10,000,000 in assets? They both earned the same profit, but one of the entrepreneurs did more with less. Thus, ROA measures how efficient a company was at generating profit from its assets.

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14 COMMENTS

  1. I've gotta thank you for these videos, this year has been a dousy for me and these videos have really helping me for my Financial Accounting class.

  2. Hello there. Thanks for this helpful video. Its been now 1 week of googling and youtubing for how to apply the formula. I think i am getting the right answer. FOR BETTER ME TO UNDERSTAND, IF I'VE GIVEN TOTAL ASSETS FOR 3 YEARS : Y1,Y2 and Y3, AND I WANT TO CALCULATE ROA FOR Y3. WHAT WILL BE MY AVERAGE ASSETS FOR Y3?
    (Y3+Y2)/2? or
    (Y1+Y2+Y3)/3?

    Please help me know the right answer. Thank you

  3. This was a great video! Thanks for the examples as I was struggling to understand how to apply this principle in my supply chain management class.

  4. Edspira, I just wanted to say I really appreciate all the videos you do and how well you explain the topics. Without you Accounting 1, Accounting 2, and Intro to Finance would have been impossible. I owe you a BIG hug. Thanks for all you do. 🙂

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