What Is Return on Average Assets (ROAA)?
Let me explain return on average assets (ROAA) directly to you—it's a key indicator that assesses how profitable a firm's assets are, and you'll see it most often in banks and financial institutions as a way to measure performance. Sometimes people swap it with return on assets (ROA), but ROA might use current assets instead of the average, so keep that distinction in mind.
Key Takeaways
- Return on average assets (ROAA) shows how well a company uses its assets to generate profits and works best when comparing to similar companies in the same industry.
- ROAA formula uses average assets to capture any significant changes in asset balances over the period being analyzed.
- Companies that invest heavily upfront into equipment and other assets typically have a lower ROAA.
Understanding Return on Average Assets (ROAA)
You should know that ROAA reveals how efficiently you're utilizing your assets, and it's especially handy for evaluating peers in the same sector. Unlike return on equity, which looks at returns from invested and retained funds, ROAA focuses on the assets bought with those funds. The result can vary a lot by industry—firms that pour money into equipment upfront will have a lower ROAA. Generally, aim for 5% or better; that's considered solid. The ratio tells you straight up how well assets are turning into profits. You calculate ROAA by dividing net income by average total assets, and express it as a percentage.
The ROAA Formula
Here's the formula you need: ROAA equals net income divided by average total assets. Net income comes from the same period as the assets, and average assets are (beginning assets plus ending assets) divided by 2. You'll find net income on the income statement, which recaps performance over time. For assets, check the balance sheet, but remember it's a snapshot—so average them from start and end of the period for accuracy. This smooths out fluctuations and gives a better view of efficiency.
ROAA Example
Take Company A with $1,000 net income at the end of Year 2. Assets were $5,000 at the end of Year 1 and $15,000 at the end of Year 2. Average assets are ($5,000 + $15,000)/2 = $10,000. So ROAA is $1,000 / $10,000 = 10%. If you just used Year 1 assets, it'd be 20%—showing more income on fewer assets. Using only Year 2 gives 6%, meaning less income on more assets. This shows why averaging matters.
How ROAA Differs from ROA
If ROA uses average assets, it's the same as ROAA. But if it uses just beginning or ending assets, ROAA is more accurate because it smooths volatility over the period.
What Are Average Assets?
Average assets are often reported on balance sheets as the midpoint value over a period, like (beginning assets minus ending assets) divided by two—wait, actually it's beginning plus ending divided by two. This accounts for daily fluctuations in business.
How ROAA Differs from Return on Total Assets (ROTA)
ROAA uses net income over average total assets, while ROTA uses EBIT (earnings before interest and taxes) in the numerator, but both divide by average total assets.
Other articles for you
Euro Medium Term Notes (EMTNs) are flexible debt instruments issued outside the US and Canada, providing funding options for various entities with diverse currencies and maturities.
A noise trader is an investor who makes buy or sell decisions based on unreliable signals that don't yield better returns than random choices, contributing to market noise despite debates on rationality.
Irrational exuberance describes excessive investor optimism that inflates asset prices beyond their fundamental values, often leading to market bubbles and crashes.
The nanny tax requires employers of household workers to withhold and pay specific federal taxes on wages exceeding certain thresholds.
A white candlestick represents a bullish period in trading where the closing price is higher than the opening price.
The Over-55 Home Sale Exemption allowed older homeowners to exclude capital gains from home sales but was replaced in 1997 by broader tax relief for all.
A greenshoe option allows IPO underwriters to sell extra shares to stabilize prices and meet high demand.
War risk insurance protects against financial losses from wars, invasions, terrorism, and other political upheavals, often excluded from standard policies.
Treaty reinsurance is a contract where insurers transfer risks of specific policy classes to reinsurers for stability and risk management.
A special warranty deed offers limited title protection only for issues during the seller's ownership, unlike the broader coverage of a general warranty deed.