Return On Total Assets (ROTA)

Posted in Finance, Accounting and Economics Terms, Total Reads: 999
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Definition: Return On Total Assets (ROTA)

It is a ratio that is calculated as follows -

ROTA = Earnings before interest & taxes/total net assets

It is an indicator of the efficiency and effectiveness with which the firm is using its assets to produce the earnings before any contractual obligations are met. As a result, the higher a company’s earnings (EBIT) per unit of assets, the more effective is the usage of assets.

EBIT is calculated by adding back interest and taxes to the net income obtained from an income statement. Total net assets are calculated as total assets less the depreciation & allowance for bad debts.

It is also known as return on assets ratio. As the role of assets is to generate revenues as well as profits, this particular metric helps the investors, shareholders and managers realise how well assets are being channelled into profits. For companies that have capital assets as big part of their investments, this metric is also equivalent to the return on investment.

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