# Return on Assets Calculation

Return on Assets Calculation. Return on Assets Ratio, return on net assets, and what is return on assets.

## Return on Assets Ratio

What is return on assets? The return on assets ratio is a comprehensive measure of total management performance. This variable is highly correlated with return on equity. The higher a company’s return on total assets, the higher its return on equity.

## Return on Assets Calculation

Return on Assets = 100 multiplied by (Gross Profit / Total Assets).

Return on net assets thus relates the three main business operational variables of revenue, cost, and assets employed. This ratio measures the success of company management in using company assets to generate an operating surplus.

One important different between ROE and ROA is that while ROE uses net profit, ROA uses gross profit.

## Return on Net Assets

Return on total assets is the most important determinant of return on equity, which is in turn the most important determinant of company value. Return on total assets is also the best measure of a company’s operating efficiency, as it is the financial ratio over which company management has perhaps the greatest control.

## More on Return on Assets Ratio

The return on assets ratio can also be expressed as a company’s profit margin (or margin on sales percentage) multiplied by its asset turn (or total sales to total assets ratio):

- Profit Margin = (Profit before Interest and Tax / Total Sales)
- Asset Turn = (Total Sales / Total Assets)

Notice that if you multiply the two ratios above, ‘total sales’ would cancel out and you will be left with the original calculation for return on assets (Gross Profit or Profit before Interest and Tax / Total Assets).

Profit Margin is an important figure that is an excellent indicator of a company’s profitability.

Nonetheless, do note that different sectors have different ROTA and ROE averages. As the nature of business differs across sectors, what may be considered ‘above average’ in one sector may be ‘below average’ in another sector, and vice versa.

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