Accounting: Return on Assets
Why does a business purchase assets? To make money in the future, of course! And one of the best ways to measure the success of the business is the return on assets.
The return on assets (ROA) is the amount of income generated by assets. (In business, a return is what the business gets back from something.) It is calculated by dividing net income by average total assets. Average total assets, in turn, is calculated by adding beginning total assets to end total assets, then dividing by two.
Let's look at an example. Dynabiz has total assets of $90,000 at the beginning of the year and total assets of $110,000 at the end of the year. During the year, Dynabiz made $40,000 in net income. What was their return on assets?
Of course, it is better to have a high return on assets, but some industries have lower average ROA. Technology companies often have a high ROA, but their market is more volatile; banks, on the other hand, are more durable despite having a lower ROA. It is important to compare with other businesses in the same industry.
Sometimes, an accountant will try to calculate the return from a single asset. However, it can be hard to isolate the revenues and expenses generated by one asset among many.