By calculating the return on assets (ROA), one can learn a lot about a companyâ€™s profits relative to its total assets during a period. It is an indicator/formula to evaluate how efficient a companyâ€™s management is at using its assets to generate earnings. Return on assets also known as â€śReturn on Investmentâ€ť. Investors and analysts perform the calculation of a companyâ€™s ROA to other companiesâ€™ ROA of the same industry for analysis of companyâ€™s capability to earn returns on its invested assets.
In this article, we will discuss the following:
- What is Return on Assets? â€“ Definition & Analysis
- ROA Formula
- How to Calculate Return on Assets (ROA) in Excel?
- Limitations of ROA
What is Return on Assets (ROA)? â€“ Definition & Analysis
Return on assets (ROA) aka return on investments (ROI) serves as a returns ratio allows business owners, managers, analysts, and even investors to analyze how efficiently the company is using its total assets to generate earnings. Here, total assets include all assets such as cash, inventory, and receivable accounts.
Since the company assetsâ€™ sole purpose is to generate profits and revenues, this ratio allows both management and investors see how well a company is using its assetsâ€™ investments into profits. As an investor, you can use ROA metric in the evaluation of return on investment.
Technically, it is a quick gauging metric of a companyâ€™s profitability, which is very easy to compute and interpret.
It is a metric which calculated in a percentage as:
Return on Assets (ROA) = Net Income / Total Assets
Here the net income comes from the income statement and Total assets come from the balance sheet of the company.
How to Calculate the ROA Ratio in Microsoft Excel?
This ROA formula can also be calculated in Microsoft Excel where one can determine the efficiency of a company in generating earnings in relative to its assets.
For example, letâ€™s calculate the ROA ratio of Tata Motors Ltd. As of March 31, 2018, the Tata Motors Ltd. reported Rs 8988.91cr and total assets of Rs 3271918000000.00.
Now that you want to calculate the return on assets of Tata Motors in excel. Letâ€™s open a blank Microsoft excel sheet and right click on columns A & B and change the value to â€ś28â€ť for each column in â€ścolumn widthâ€ť.
- Enter â€śTata Motors Ltd.â€ť in column B1.
- â€śNet Incomeâ€ť in cell A3.
- â€śRs 8988.91crâ€ť in cell B3.
- â€śTotal Assetsâ€ť in cell A4.
- â€ś3271918000000.00â€ť in cell B4.
- â€śReturn on Assetsâ€ť in cell A5.
- â€ś=B3/B4*100â€ť in cell B5.
The resulting value (or return) on assets will appear in cell B5 which is 2.72%. This is the ROA (in percentage) of Tata Motors Ltd.
Comparing Return on Assets of Different Companies
This figure can be compared to the competitor of Tata Motors, such as Mahindra & Mahindra Ltd. whose net income for the quarter ending March 31, 2018, was Rs 7,510.39cr and total assets worth of Rs 1,363,693,000,000.00.
Right click on column C and change the value to 28 in the same way.
- Enter â€śMahindra & Mahindra Ltd.â€ť in column C1.
- â€ś31-Mar-2018â€ť in cell C2.
- â€ś=75103900000.00â€ť in cell C3.
- â€ś=1,363,693,000,000.00â€ť in cell C4.
- â€ś=C3/C4*100â€ť in cell B5.
In comparing both stats, it was found that Tata Motors Ltd. has a return on assets of 2.72% however; the Mahindra & Mahindra has a better return on assets of 5.51% and is better at converting its assets into profit. By looking at both ROAs, it is clear that Mahindra & Mahindra Ltd. is better at converting its investments into profits.
It is important for investors to keep that difference in mind because the ROA ratio indicates that which company is taking wise decisions in allocating resources and making large profits with little investments and which company is only throwing a ton of money to make profits.
Limitations of ROA
- Falling return on assets is always a problem but you should bear in your mind that ROA does not account for outstanding liabilities and sometime may signal a higher profit level than actually derived.
- A drawback of return on assets metric is that it does not consider the effect of borrowed capital.
An ROA value above 5% considered good. If a company has ROA above 5% then it is good to make investments in that company.
Hope, this article on â€śROA and its calculation in excelâ€ť helped you in a way you expected it to be. Nevertheless, if you have any query or would like to add something then doesnâ€™t forget to mention in the comment section below. We will be happy to answer all your questions.