Return on Average Assets (ROAA)
Meaning and definition of Return on Average Assets
Return on Average Assets (ROAA) can be defined as an indicator used to evaluate the profitability of the assets of a firm. Putting it simple, this return on average assets indicates what a company can do with what it possesses. Generally, it is used by companies, banks and other financial institutions as an appraisal for determining their performance. Being calculated at period ends, i.e. quarters, years etc., the return on average assets does not reveal all the highs and lows. It is, rather, just an average of the period.
As stated by Investopedia, the return on average assets is estimated by dividing the net income by average total assets. The obtained ratio is expressed as a percentage of the total average assets. Moreover, the metric reflects the efficiency of a company in utilizing the assets. Also, the ratio is helpful to aide comparison among companies in the same industry.
Formula for calculating ROAA
The general formula used for computation of ROAA is:
ROAA = Net Income / Total Average Assets
Applications of Return on Average Assets
The return on average assets is useful in measuring profits against the assets used by a company for generating profits. The ratio is an important indicator of the intensity of assets of a company. A lower ROAA ratio reflects a higher asset-intensity of the company, and vice versa. Besides, a more asset-intensive company requires a larger amount of money to continue producing revenue.
Moreover, the return on average assets ratio is also useful for investors in assessing the financial strength and efficiency of a company for using its resources. It is also imperative for the management to determine the performance of a company against its planned business goals, or market competitors.
Example of Return on Average Assets
The return on average assets can be exemplified as follows:
A company earns $2000 as net income with average assets worth $20,000. The return on average asset would, therefore, be 2,000/20,000, which is equal to 10%. This implies that the company has $0.1 of net income for every dollar of invested assets.