Return on assets is a measure of a company's profitability. In investing, the return on assets ratio provides a snapshot of how much profit a company is able to keep from every dollar it makes in sales. It's important because it helps show whether a company is using its money wisely. Here's how to calculate it.
The equation for calculating return on assets looks like this: Net income divided by total assets. You can find both these numbers in a company's annual report.
For this example, we'll use Microsoft's 2007 annual report. The company lists its net income (found on the income statement) as $14.1 billion, and its total assets (found on the balance sheet) as $40.2 billion. So the math looks like this: $14.1 billion / $40.2 billion = 0.351. Move the decimal point two places to the right, and you get a return on assets of 35 percent.
So what does this number mean? Well, a higher ROA is better, because it means a company is making more money on less investment (assets). For example, if Microsoft's total assets were $80 billion while its net income remained the same at $14.1 billion, its ROA would be 18 percent. In that scenario, Microsoft would have spent almost twice the money ($80 billion compared to $40.2 billion) to achieve the same amount of income ($14.1 billion) -- thus, its return on assets would be much lower.
Average return on assets varies widely by industry. Make sure you look at the average ROA for an industry at large when you are interpreting your results.
If you're comparing ROA between companies, make sure they are in the same industry. The ROA of a software company such as Microsoft and the ROA of a shoe company such as Crocs, for example, will be very different because of the nature of their businesses. Always compare apples to apples.