Return on Assets (ROA) Calculation, Formula & Examples

Return on assets is positively related to efficiency, but why is that? Have you ever wondered how effectively your company uses its assets to generate profits? Primarily, you can see the condition of your asset movement through ROA.

ROA is a profitability ratio that offers insights into how well a company can turn its assets into profits. It provides a predictive outlook on potential future performance based on past earnings. Understanding this ratio helps businesses assess their operational efficiency and make informed investment decisions.

Along with that, return on assets comes with various calculations and ways of calculating. For that reason, this article comes to help you understand return on total assets in more depth. Jom find the definition of return on assets, formula, and calculation example starting from below.

What is Return on Assets (ROA)?

Return on Assets (ROA) is a financial ratio that measures a company’s efficiency in using its assets to generate profits. This metric is expressed as a percentage, reflecting asset utilisation’s effectiveness in earning generation.

A high RoA indicates that a company utilises its assets efficiently, often reflecting strong management and productive operational practices. Conversely, a lower RoA might suggest that some inefficiencies or areas require improvement within the company’s operational strategies.

For investors and business owners, ROA is an essential tool for assessing investment returns. A robust ROA indicates effective asset management and strong overall performance, making the company an attractive investment option.

How to Calculate Return on Assets through Your Business

Understanding and calculating Return on Assets (ROA) is fundamental to assessing a company’s financial ratio performance. Here is an elaborate guide on how to calculate RoA:

1. Formula of Return on Asset (ROA)

The basic return on assets formula is:

RoA = (Net income after tax / Average total assets) x 100%

This formula helps determine how effectively a company utilises its assets to produce profits. For example, calculating return on assets ratio when there’s a Malaysian manufacturing firm reports a net income of RM 15 million and its total assets are worth RM 50 million, the ROA calculation would be:

RoA = (15.000.000 / 50.000.000) x 100% = 30%

A 30% return on assets ratio signifies high efficiency in asset management, indicating that the firm is successfully converting its asset base into profitability metrics.

2. Determining gross profit for return on assets ratio

The initial step in calculating ROA involves determining the company’s gross profit. This metric provides insight into the profitability of the company’s core business activities before other expenses are accounted for. The gross profit for return on assets formula is:

Gross profit = Revenue – Cost of goods sold (COGS)

For example, a tech startup in Kuala Lumpur generates RM 1 million in revenue with COGS amounting to RM 600.000. The gross profit calculation would be:

Gross profit = RM 1.000.000 – RM 600.000 = RM 400.000

This gross profit figure is critical as it helps the startup gauge its financial performance in its primary operations before considering other operational costs.

Understanding The Benchmarks of Bad and Good Returns on Assets

Are you curious about what marks a company as financially sound in Malaysia?

A return on assets of over 5% typically signals that a company effectively leverages its assets to generate profits. When this figure surpasses 20%, it places the company in an exceptional tier, truly cemerlang leh! It is the gold standard every Malaysian business strives to reach.

Yet, these percentages represent just a starting point for deeper analysis. A more telling assessment comes from comparing RoA across similar companies within the same industry. This comparison is crucial because asset intensity and operational models vary significantly across different sectors.

For example, a tech company often has a higher RoA than a manufacturing firm due to its lesser need for physical assets. A lower RoA may not suggest inefficiency in capital-intensive industries like manufacturing but rather the significant costs and depreciation tied to heavy equipment and infrastructure.

Therefore, to address these financial differences and enhance your ROA, consider using asset management software. This can minimize the substantial costs and boost efficiency across your operations. Click the banner below to learn more about the system and the full pricing scheme.

Advantages of Leveraging Return on Assets

Utilizing return on assets formula provides multiple benefits to both the management and investors of a Malaysian company, such as:

1. Efficiency analysis: Return on assets allows management to assess how effectively the company uses its capital in production and sales processes.
2. Competitor comparison: By comparing return on assets ratio values, companies can benchmark their performance against competitors, identifying areas of strength and opportunities for improvement.
3. Divisional performance evaluation: Return on assets helps evaluate the performance and productivity of different company divisions, aiding in effective management and strategic improvements.
4. Product profitability analysis: ROA is instrumental in assessing the profitability of various products, guiding strategic decisions on product focus and resource allocation.

Strategic Tips for Enhancing Return on Asset

To maximize your Return on Assets (ROA), consider the following strategic approaches:

1. Optimize asset utilization: Begin by improving your asset management. Implementing efficient inventory practices, for example, can significantly reduce excess stock and associated costs.
2. Embrace technology for better asset management: Advanced asset management software provides real-time insights into asset performance, enabling better decision-making and improved operational efficiency.

However, we understand that choosing an ERP software Malaysia that can simultaneously calculate ROA and other financial needs is not easy. Therefore, here we present one of the best return of assets system vendor for you in Malaysia.

Optimize your Return of Assets Calculation with HashMicro’s Integrated Asset Management Software

Understanding the details of return of assets formulas and calculations carefully might make you realize that asset software can increase asset efficiency in business management. For that, let’s get to know more about the best asset control system vendor in Malaysia, namely HashMicro.

Since its establishment in 2015 in Singapore, HashMicro has offered accounting software complete with free demo and business consultation. HashMicro presents excellent features that make it easier to manage and calculate ROA, such as:

• Integration with various systems: Integrate purchasing, employee, and construction accounting software to control the budget allocation of new asset purchases and manage asset rental costs.
• Profit & loss analysis: Provide a report that can provide information regarding the deviation between the estimated profit and loss based on the predetermined budget value and the actual profit and loss value.
• Asset report automation: Review the asset’s whole activity history, including the risk of history modification and AI recommendations on cost analysis for the most advantageous decision-making.
• Comprehensive asset monitoring: With barcode scanner integration, you can easily monitor your company’s assets. Also, you can manage asset contracts effectively in one system, including activation costs, contract types, vendors, and insurance premiums.
• Preventive maintenance scheduling: Easily create asset maintenance schedules to prevent unexpected operational disruptions.

Conclusion

Boosting your return on assets reflects well on your asset management capabilities and significantly enhances your company’s financial health. By adopting strategies such as HashMicro’s Asset Control Software, businesses can improve their ROA, streamline operations, and boost profitability.

For a holistic asset management solution that caters to many industries in Malaysia, exploring HashMicro’s asset control system is the best option. Sign up for a free demo today to experience its transformative benefits.

FAQs About Return on Assets

• What is the difference between ROI and ROA?

  ROI (Return on Investment) measures an investment’s overall profitability, showing the percentage return on the original amount invested. In contrast, ROA (Return on Assets) assesses explicitly how efficiently a company uses its assets to generate earnings, highlighting operational effectiveness.

• Is it better to have a higher ROE or ROA?

  Choosing between higher ROE and ROA depends on your focus: ROE evaluates how effectively a company generates income from equity. At the same time, ROA measures how efficiently a company uses its assets to generate profits, which is important for assessing management’s effectiveness.

• What is the ROI of assets?

  The ROI of assets measures the profitability or efficiency of an asset investment by comparing the gains from these assets to their cost. It helps determine how well an investment in assets is performing in generating returns.

• How to calculate ROI on assets?

  To calculate ROI (Return on Investment) on assets, you can use the formula: ROI = (Net Profit : Total Assets) × 100. This calculation will give you the percentage return the assets have produced relative to their cost.