Return on Assets

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Definition: Return on Assets

Return on Assets is one of the profitability ratios used for company analysis. It tells us how much the company’s assets on average contribute to generate income for the company. In other words it tells us how effectively a company is using its assets to generate the income. Higher is the return on assets higher is the effectiveness of the assets in generating the income. It is calculated as:


Return on Assets =  Net Income

                              Average total assets

Example:

Company A is having assets of 1000 crore in year 2004 and 2000 crore in year 2005. Its net income at end of 2005 is 100 crore.

Average total assets of company A = (1000 + 2000)/2

                                                  = 1500 crore

Return on assets = 100/1500

                         = 0.067

Hence, this concludes the definition of Return on Assets along with its overview.

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