## What is Return on Average Assets?

The term “return on average assets” or ROAA refers to the financial metric that helps in assessing how effectively a company is utilizing its assets to generate a net profit. To put it simply, this metric indicates the asset intensity of a company, such that a higher value of ROAA indicates lower asset intensity and vice versa.

**Formula **

The formula for ROAA can be derived by diving the net income by the average total assets, which is then expressed in terms of percentage. Mathematically, it is represented as,

**Return on Average Assets = Net Income / Average Total Assets**

While net income is easily available as a separate line item in the income statement, average total assets can be computed as the average of the total assets at the beginning and at the ending of the year.

**Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2**

**Examples of Return on Average Assets (With Excel Template)**

Let’s take an example to understand the calculation of Return on Average Assets in a better manner.

#### Example #1

**Let us take the example of a company that manufactures soft drinks bottles and has its unit in the village of Wheeling, IL (US). The company generated a net income of $25 million during the year 2018, while its total assets stood at $110 million at the start of the year and ended the year at $120 million. Based on the given information, calculate the ROAA of the company for the year 2018.**

**Solution:**

Average Total Assets is calculated using the formula given below

**Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2**

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- Average Total Assets = ($110 million + $120 million) / 2
- Average Total Assets =
**$115 million**

Return on Average Assets is calculated using the formula given below

**Return on Average Assets = Net Income / Average Total Assets**

- Return on Average Assets (ROAA) = $25 million / $115 million
- Return on Average Assets (ROAA) =
**21.74%**

Therefore, the company managed a ROAA of 21.74% during the year 2018.

#### Example #2

**Let us take the example of Walmart Inc. to illustrate the computation of ROAA. During 2018, the company generated a net income of $10.52 billion and its total assets at the beginning and at the ending of the year were $198.83 billion and $204.52 billion respectively. calculate Walmart Inc.’s ROAA for the year 2018 based on the given information.**

**Solution:**

Average Total Assets is calculated using the formula given below

**Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2**

- Average Total Assets = ($198.83 billion + $204.52 billion) / 2
- Average Total Assets =
**$201.68 billion**

Return on Average Assets is calculated using the formula given below

**Return on Average Assets = Net Income / Average Total Assets**

- Return on Average Assets = $10.52 billion / $201.68 billion
- Return on Average Assets =
**5.22%**

Therefore, Walmart Inc.’s ROAA for the year 2018 stood at 5.22%.

**Source Link: Walmart Inc. Balance Sheet**

#### Example #3

**Let us now take the example of Apple Inc. to illustrate the concept of ROAA. During 2018, the company generated a net income of $59.53 billion, while its total assets at the start and end of the year were $375.32 million and $365.73 billion respectively. calculate Apple Inc.’s ROAA for the year 2018 based on the given information.**

**Solution:**

Average Total Assets is calculated using the formula given below

**Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2**

- Average Total Assets = ($375.32 billion + $365.73 billion) / 2
- Average Total Assets =
**$370.53 million**

Return on Average Assets is calculated using the formula given below

**Return on Average Assets = Net Income / Average Total Assets**

- Return on Average Assets = $59.53 billion / $370.53 million
- Return on Average Assets =
**16.07%**

Therefore, Apple Inc.’s ROAA for the year 2018 stood at 16.07%.

**Source Link: Apple Inc. Balance Sheet**

### Advantages of Return on Average Assets

Some of the major advantages of return on average assets are:

- The computation of the ratio is very easy since both net income and average assets are easily available from the annual report.
- It assesses the company’s ability to utilize its assets to generate profits.

### Limitations of Return on Average Assets

Some of the major limitations of return on average assets are:

- In the case of peer comparison, this ratio can’t be used for comparing the performances of companies operating in different industries.
- The ratio assumes asset value at the beginning and end of the period is reflects the asset value experienced on a regular basis, which is not always the case.

### Conclusion

So, it can be seen that ROAA is a financial metric that is used by investors to assess how well a company can utilize its assets for profit maximization. The financial ratio focuses on the fact that net profit margin and gross profit margin are not enough to analyze a company, as an investor you should also know the ability of the company to utilize its assets to generate profits.

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