Return on Assets
| The return on assets calculation shows how effectively a company employed its assets to generate profits. |
Return on assets is calculated as:
Calculating Return on Assets
| Net Income/Total Assets |
Because a company may own or finance its assets, the return on assets formula measures how well a company has converted all of its resources into profit, whether the asset is owned or financed (Assets = Liabilities + Owner’s Equity).
The return on assets calculation is therefore the most stringent measure of how well a company has utilized its resources to generate profits.
A higher number indicates a firm more effectively employed its assets to generate profits.
Asset intensive industries such as manufacturing and railroads have much lower percentages of income to assets due to a much larger asset base, while the software industry generally has much higher percentages of net income to assets due to fewer assets required to generate profits.
For this reason it is important to compare the results with industry standards and competitors.
Sunny Sunglasses Shop has a return on assets financial ratio of 15.1 calculated as:
| 15,283/101,008=15.1% |
Industry Ratios: Return on Assets
| Company | Return on Assets |
| Microsoft | 23.6% |
| Software Industry | 15.4% |
| Sunny Sunglasses Shop | 15.1% |
| S&P 500 | 8.9% |
| Specialty Retail, Other | 7.9% |
| Sunglasses Hut Int. (Luxottica Group) | 5.5% |
This means that Sunny Sunglasses Shop earned $.15 for each dollar of assets employed, while its closest competitor, Luxottica, earned $.055 for each dollar of assets employed, and the specialty retail industry averaged approximately $.079 for each dollar of assets employed.
High return on asset levels may be due to a short – term factors such as:
- One time gains that increase earnings and ROA.
- A strong economy or peak in the business cycle.
For this reason it is important to review a long-term average of ROA:
Industry Ratios: Return on Assets Five Year Averages
| Company | ROA Five Year Averages |
| Microsoft | 22.7% |
| Software Industry | 14.9% |
| S&P 500 | 8.1% |
| Specialty Retail, Other | 6.6% |
| Sunglasses Hut Int. (Luxottica Group) | 6.1% |
Luxottica, the Specialty Retail Industry, and the Software Industry posted slightly lower return on asset ratios over five years.
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