Definition of Return On Assets (ROA) And ROA Formulas

Definition of Return On Assets (ROA) and ROA Formulas – Return on Assets is a profitability ratio that shows the percentage of profits (net income) obtained by a company in relation to overall resources or the average number of assets. In other words, Return on Assets or often abbreviated as ROA is a ratio that measures how efficient a company is in managing its assets to generate profits during a period. ROA is expressed as a percentage (%).

It can be said that the sole purpose of a company’s assets is to generate revenue and of course also generate profits for the company itself. This ROA or Return on Assets ratio can help management and investors see how well a company is able to convert its investment in assets into profits.

The Return on Assets can actually be considered as a return on investment for a company because in general capital assets are often the biggest investment for most companies. In other words, money or capital is invested into capital assets and the rate of return or return is measured in the form of profits or profits (profits) obtained.

The rate of return on these Assets is different in different industries. Capital-intensive industries such as the Railroad Industry, Mining Industry, and High-tech Electronic Equipment Industry will produce a low rate of return on assets, this is because these industries require expensive assets to conduct their business.

Whereas industries that are not capital intensive such as the software industry or the service industry will produce a high rate of return on assets or ROA ratio because these industries do not require expensive assets. Therefore,

ROA (Return on Assets) formula

ROA (Return on Assets) or is calculated by dividing the net income of the company (usually annual income) by the total assets and displayed as a percentage (%).

There are two common ways of calculating ROA, namely by calculating total assets on a certain date or by calculating average total assets. The following is the ROA (Return on Assets) Formula.

ROA formula

Return on Assets (ROA) = Net profit after tax / total assets (or average total assets)

Example of ROA (Return on Assets) Calculation

Based on financial statements as of 31/12/2016, the net income or net income of ABC company is $ 1.713 million while the total assets are $ 61.433 million. What is the ROA or Return on Assets of ABC?

Answer:

ROA = Net profit after tax / total assets (or average total assets)
ROA = Rp. 17 million / Rp. 61 million
ROA = 2.78%

So ROA PT. ABC company with this ABC issuer code of 2.78%.

ROA Analysis (Return on Assets)

As mentioned earlier, this Return on Assets Ratio is useful for measuring how efficient a company is in being able to convert the money used to buy assets into net income.

A higher ratio shows that the company is more effective in managing its assets to produce a greater amount of net profit. ROA will be very useful when compared to companies engaged in the same industry because different industries will use different assets in carrying out their operations.

For example, mining companies must use large and expensive equipment, while software companies only use computers and servers in their business.

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