# VMC: What Is Return on Assets?

The post was originally published here.

## Definition of Return on Assets

• The return on assets focuses on how profitable a company is in relation to its total assets.
• The ratio is always presented in the form of a percentage.
• The higher the ratio, the more efficient and productive a company is.

## What is the Formula for Return on Assets?

• The return on assets can be calculated by dividing the net income by the average assets.

Net income ÷ Average assets

• The average total assets can be calculated by adding the beginning and ending total assets and dividing them by 2.

## Return on Assets in Practice

• Harvey’s law firm generates \$5,000,000 each year. However, Harvey has to pay \$1,200,000 to his partners and employees, \$400,000 to utilities, and \$300,000 for rent.
• Harvey’s law firm starts the year with \$10,000,000 in assets and ends the year with \$9,300,000 in assets. What is the return on assets for the law firm?
• 5,000,000 – 1,200,000 – 400,000 – 300,000 = \$3,100,000
• (10,000,000 + 9,300,000) ÷ 2  = \$9,650,000
• 3,100,000 ÷ 9,650,000 = 0.321
• 0.32 x 100 = 32%
• Therefore, for every dollar assets, Harvey’s law firm invests in will generate 32 cents for the law firm.

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