Return on assets (ROA) is one of the profitability ratios used to gauge the efficiency of firm to generate income from its assets. ROA shows the relationship between net income and total assets of a company.
Higher degree of this ratio is always considered favorable and shows the strength of management to generate profit by utilizing its assets.
Formula for the calculation of return on assets (ROA):
Return on assets is calculated by dividing the net income by total assets. Therefore, the formula which can be used in performing the calculation is
Return on assets = Net Income/ Total assets
For better picture, total average assets is used instead of total assets.
Return on assets = Net Income / Average assets
Average assets is calculated by taking the average of assets at the beginning and assets at the end of the period.
Average assets = (Assets at the beginning + Assets at the end) / 2