VMC: What Is Return on Assets?
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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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DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article.