- What is return on assets?
- Return on assets formula.
- Example of how to calculate return on assets.
- Frequently asked questions about return on assets.
- The significance of return on assets.
What is return on assets (ROA)?Return on assets is a financial metric that tells you how much profit a company generates relative to the value of its assets. A company's assets encompass all of the resources that it owns or controls that produce business value.
Return on assets formulaThe formula for ROA, which is expressed as a percentage, is straightforward:
Example of how to calculate return on assets
There are two ways to calculate return on assets -- by using net income and total assets and by using net profit margin and asset turnover. All the numbers needed in these calculations can be obtained from a company's financial statements. We'll use 2020 results from healthcare giant Johnson & Johnson (JNJ 0.32%) as an example to illustrate both methods.
Calculating ROA using net income and total assets
- Find Johnson & Johnson's 2020 net income on its income statement. The income statement for 2020 is found in the company's latest 10-K (annual) report with the U.S. Securities and Exchange Commission (SEC). The Johnson & Johnson 10-K report for 2020 indicates that the company generated net income of $14.7 billion.
- Find the company's total assets on its balance sheet, which is also contained in the 10-K filing. J&J's total assets at the end of 2020 were valued at $174.9 billion.
- Divide Johnson & Johnson's net income by its total assets and then multiply that amount by 100. Net income of $14.7 billion divided by total assets of $174.9 billion gives a result of 0.084, which is multiplied by 100 to produce an ROA of 8.4% for the company in 2020.
Calculating ROA using net profit margin and asset turnover
- Find Johnson & Johnson's net income on its income statement. As noted in the example above, the company's net income in 2020 was $14.7 billion.
- Find the company's total revenue on its income statement. J&J's total revenue in 2020 was $82.6 billion.
- Calculate Johnson & Johnson's net profit margin by dividing its net income into its total revenue and multiplying that amount by 100. Divide the company's net income of $14.7 billion by its total revenue of $82.6 billion. Multiplying that amount by 100 yields a net profit margin for the company of 17.8%.
- Calculate the average value of the company's assets during the year. The 10-K report indicates that J&J's total assets were valued at $157.7 billion at the end of 2019. At the end of 2020, the company's total assets were worth $174.9 billion. The average of those two numbers -- $166.3 billion -- equals the company's average asset value during the period.
- Calculate asset turnover rate by dividing the company's total revenue into the average asset value and multiplying that amount by 100. Dividing the total revenue of $82.6 billion by the average asset value of $166.3 billion and converting that value into a percentage yields an asset turnover rate of 50%.
- Multiply Johnson & Johnson's net profit margin by its asset turnover rate to calculate its 2020 return on assets. The company's net profit margin of 17.8% times its asset turnover rate of 50% yields an ROA of 8.9%.
Return on assets vs. return on equity (ROE)
Return on assets is similar to another financial metric -- return on equity (ROE). Both ROA and ROE measure how well a business is performing. The key difference between the two is that ROE divides net income by shareholder's equity instead of by total assets as ROA does.