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Return on Average Assets (ROAA) Formula | Calculation with Example - YouTube
Channel: WallStreetMojo
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by clicking the bell icon friends today we
are going to learn a topic that is
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return on average assets formula which
is ROAA
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again a part of our ratio analysis
chapter now if you consider this formula
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return on average assets formula it is
basically your net income that is after
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deducting all the operating expenses and
any other extraordinary ancillary
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expenses you get your net income divided
by the average total assets so what is
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this formula all about so we need to
learn that now the return on the average
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assets formula helps to helps to find
out the how how far the company is
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utilizing its assets this is what we are
supposed to analyze so for investor
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every profitability ratio
is important and only the net profit
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margin only the net profit margin and
the gross margin won't help so the
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investor also needs to know how well the
assets are being utilized to generate
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the profits so the ROAA that is a
return on average assets formula finds
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out just that a profitability ratio you
can say just as the profitability ratio
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that tells us how well a company uses
its assets to fuel its profits
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so this is the exact interpretation now
here's the return on the average as it's
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a formula the return or than the average
asset formula we just saw is ROAA
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is basically your net income divided by
the average
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total assets this is going to be a
formula now let's understand and take
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this with the help of an example of ROAA
formula let's take a simple example to
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calculate ROAA formula let's
say there is a company called eyelash
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eyelash company that is some following
in information as followed the net
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income which is 1,50,000 then we
have the beginning total assets as
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5,00,000
and our ending total assets
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but ending total assets are going to be
$4,00,000 so what we need to
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find is the ROAA first we'll add
up the beginning and the ending total
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assets and then take a simple average of
this two and then we'll put put down in
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the formula so first thing that first
and foremost is the average
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total assets
right so this is the first and the
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foremost thing and that's going to be is
equal to bracket open up the beginning
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total assets plus your ending total
assets divided by two that will be your
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average which is your 4,50,000 now using the return on the
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average asset formula we can return on
the average assets ROAA
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formula is equal to your net income
divided by your average total assets so
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let's put down the number net income
divided by the average total assets and
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this is going to be your answer
1,50,000/4,50,000
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so 33.33
is your return on average total assets
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right now the explanation part some of
the explanation part on the return on
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average assets formula
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in the in this ratio there are 2
components the first component is the
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net income now if we can look into the
net income statement of the company we
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would be able to find out the net income
so the income statement basically helps
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you to find this
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have you to be able to find out the net
income and net income is a last item in
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the income statement so when we deduct
the taxes when we deduct the taxes from
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the profit before tax the PBT we get the
profit after tax that is the PAT
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or the net income so the second
component in the ratio that we have is
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the average total assets now to find out
the assets we need to look into the
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financial statement the FS of the
company that is the balance sheet and in
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the balance sheet we'll find both the
current assets and the non current
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assets nca so to find out the average
total average total assets we need to
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consider the total assets
of a fork for both at the beginning and
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at the end and then we need to add up
the beginning of the total assets and
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the ending total assets and divide the
sum by to get the simple average now
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what is exactly the use of this
particular formula let's understand the
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application of ROAA formula from
the two point of view the first for the
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investors now for the investors it is
important to know whether the company is
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a financially strong and healthy you can
see When financially if they are strong
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or not so to know that they use the ROAA formula and to see how well the
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company is utilizing its assets
second if the ROAA that is your ratio
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if that is lower it is easily understood
that the company is
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higher
the company's having the higher assets
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intensive it's a higher higher asset
intensive company on the other hand if
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ROAA ratio if this is higher
in nature then in that scenario or the
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company is a lower asset intensive
so the investor need to look at the
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industry first before interpreting the
ratio because the higher asset you can
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see the higher asset intensive industry
but the higher asset industry you
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consistency first before interpreting
the ratio because the higher asset
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intensive industry will always result in
the lower our ROAA ratio for the
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company and vice versa the case so for
the management the ratio is also
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important because the ratio can talk a
lot about the performance of the company
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and by comparing the ratio with a
similar company under the same industry
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management would be able to understand
how well the company is doing now this
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is basically your your calculator for
the ROAA formula the net income
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let's say if we put 1,00,000 over here
in the average total assets as 1 million
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then the return on the total asset
formula is 10% so we will write
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something over here for our analysis
purpose net income the average total
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assets and then we have
the ROAA formula so if your net
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income let's say if it increases keeping
your average total as same what exactly
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happens let's increase this to 1,10,00 so it becomes 11% so this
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also increases and absolutely if your
income decreases then keeping this as
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same your are ROAA formula also
decreases you just will need to decrease
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this to let's say 9,00,000
and sorry 90,000 if it reduce 90,000 it
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will reduce to 9% but at the same time
if we reduce the average total assets to
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let's say 9,00,000 your ROAA
formula will also come back to 10% so at
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the end of the day you can put down some
numbers play with the numbers and you
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can you will come up with some really
interesting interpretation of the
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formula so that's it for this particular
topic if you have learned and enjoyed
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