An entrepreneur’s initial investment into a business is the company’s assets. The main purpose for the original investment is to generate income. It’s important to realize a good return, but just how much return depends on the industry. This article looks at the importance of the return on assets (ROA), how it’s calculated and how it’s measured.
How to Calculate Return on Assets
Since the main purpose for business assets is to generate income, ROA measures how well the company’s assets are working within a given accounting cycle. A higher percentage means the company does a good job of utilizing what it has. The formula for calculating return on assets is:
ROA = Net Income / Average Total Assets
To get an accurate percentage, the net income for a given accounting cycle needs to be calculated with the total average assets for the same accounting cycle. For example if the year-end financial statements are used for calculating ROA, total net income would be reported for the year.
