Return on Total Assets Formula (ROTA)

Return on total assets (ROTA) is one of the profitability indicators that measures how efficiently the firm manages its assets to earn profits. Its formula is a simple ratio of Operating Profit to Average Assets of the company.

Return on Total Assets Formula = Operating Profit (EBIT) /Average Total Assets

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Where,

EBIT will stand for Earnings Before Interest and Tax

Explanation

The return on assets ratioReturn On Assets RatioReturn on assets (ROA) is the ratio between net income, representing the amount of financial and operational income a company has, and total average assets. The arithmetic average of total assets a company holds analyses how much returns a company is producing on the total investment made.read more formula will measure how effectively the firm or the organization can earn a return on its investment made in assets. In other words, ROTA depicts how efficiently the firm or the company or the organization can convert the amount or the money used to purchase those assets into operating profits or operating income.

Since all assets can be funded either by debt or equity, the ratio must be calculated by adding back interest expense in the formula above. Operating incomeOperating IncomeOperating Income, also known as EBIT or Recurring Profit, is an important yardstick of profit measurement and reflects the operating performance of the business. It doesn’t take into consideration non-operating gains or losses suffered by businesses, the impact of financial leverage, and tax factors. It is calculated as the difference between Gross Profit and Operating Expenses of the business.read more has to be computed for the numerator. Then one needs to take average assets in the denominator since the firm keeps running a business, an asset keeps changing in the entire year, and hence taking one total asset will result in the perhaps biased figure.

Examples of Return on Total Assets Formula

Let’s see some simple to advanced examples to understand them better.

Example #1

HBK limited has provided you with the following details from theirFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more financial statementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more. You are required to do the calculation of ROTA.

  • Operating Income (EBIT): 100000.00Total assets during the start of the year: 1000000.00Total assets during the end of the year: 1500000.00

Solution

We are given operating income, also calledEarnings before interest and tax (EBIT) refers to the company’s operating profit that is acquired after deducting all the expenses except the interest and tax expenses from the revenue. It denotes the organization’s profit from business operations while excluding all taxes and costs of capital.read more EBITEBITEarnings before interest and tax (EBIT) refers to the company’s operating profit that is acquired after deducting all the expenses except the interest and tax expenses from the revenue. It denotes the organization’s profit from business operations while excluding all taxes and costs of capital.read more, which is 1,00,000.

Secondly, we need to calculate average assets, total assets during the start of the year and the end of the year, and then divide it by 2, which would be 12,50,000.

Therefore, the calculation of return on total assets (ROTA) can be made as,

ROTA will be –

=  100,000 /12,50,000

ROTA = 8.00%

Example #2

GMP Inc. is one of the hot stocks in the market due to its outstanding brand recognition, and investors believe it will outperform the market over the coming years. John is considering investing in the stock. He heard in a seminar that the profitability ratio of GMP Inc. is not up to the mark, and shareholders and debt holders aren’t happy about the same. He knows that if the ratio is less than 8%, then the company’s return is indeed poor. John decides to calculate Return on total assets to confirm what he learned in the seminar is indeed true?

You must calculate the return on total assets based on the information below and conclude if the company’sProfitability ratios help in evaluating the ability of a company to generate income against the expenses. These ratios represent the financial viability of the company in various terms.read more profitability ratioProfitability RatioProfitability ratios help in evaluating the ability of a company to generate income against the expenses. These ratios represent the financial viability of the company in various terms.read more (return on total asset) is indeed poor?

  • Sales: 50050000Cost of goods sold: 37537500Selling Expenses: 202000Administrative Expenses: 1001000Depreciation: 4004000Income Tax: 2502500Total Expenses: 44544500Total Average Assets: 101000000

The average assets of the company were 101 million.

We are not given operating income, which we will calculate below.

Operating Profit

Secondly, we need average assets, which are given as 101 million.

=55,05,500    x 100 /10,10,00,000

ROTA will be = 5.45%

Example #3

Common people are limited to incorporated as an NGO and as a not-for-profit organizationNot-for-profit OrganizationA not-for-profit organization refers to a legal entity that isn’t created to generate profits or revenue for its owners but aims at social, educational, religious or public welfare and service. Such an organization is tax-exempted and run through donations or any other income it makes.read more. The management presented the below summary and stated that they are incurring an operating loss. The trustee believes that the management is secretly making a profit, and that is not getting revealed in the books of accounts.

  • Sales: 37537500Cost of goods sold: 28153125Selling Expenses: 1501500Administrative Expenses: 750750Depreciation: 3003000Interest: 4504500Total Expenses: 33408375

The Trustee found thatInterest expense is the amount of interest payable on any borrowings, such as loans, bonds, or other lines of credit, and the costs associated with it are shown on the income statement as interest expense.read more interest expenseInterest ExpenseInterest expense is the amount of interest payable on any borrowings, such as loans, bonds, or other lines of credit, and the costs associated with it are shown on the income statement as interest expense.read more was unduly stated higher and is not considered while calculating operating profit. Hence, he investigated and found out that interest expenses were 10% of sales.

You must calculate the return on total assets based on the above figures and assume total assets as  9,79,70,000.

Solution:

To calculate operating profit, interest needs to be avoided in the calculation.

Below is the calculation of operating income (EBIT)

=41,29,125.00 /9,79,70,000.00

ROTA =4.21%

Hence, the claim made by management is incorrect, and they are making a profit in an NGO.

Return on Total Assets Calculator

You can use this calculator

Relevance and Uses

If the ROTA ratio is higher, it is considered more favorable to the stakeholders or the investors as it depicts that the firm or the company is more effectively and efficiently managing its assets to earn or produce greater amounts of profit or income. A non-negative ROTA ratio generally indicates an upward trend of profit as well.

ROTA is widely used when comparing firms or companies in the same industry as several industries use assets differently. For example, construction companies will use expensive equipment, which is large, while software firms or companies shall use servers and computers.

This article has been a guide to Return on Total Assets Formula. Here we discuss how to calculate ROTA and practical examples, uses, and interpretation. You can learn more about excel modeling from the following articles –

  • Total Assets FormulaTotal Assets FormulaTotal Assets is the aggregate of liabilities and shareholder funds. It can also be computed by combining current and noncurrent assets.read moreReturn on Operating AssetsReturn On Operating AssetsReturn on operating assets is the rate of return that a company gains by having it’s operating assets into efficient use. Operating assets are the assets in the balance sheets of the company that are used for daily operations, unlike financial assets which are used as an investment or as a balance sheet statement.read moreROI FormulaROI FormulaThe return on investment formula measures the gain or loss made on an investment relative to the amount invested. The net income divided by the original capital cost of investment. Return on Investment Formula = (Net Profit / Cost of Investment) * 100
  • read moreCapital Employed ExplanationCapital Employed ExplanationCapital employed indicates the company’s investment in the business, i.e., the total amount of funds used for expansion or acquisition and the entire value of assets engaged in business operations. “Capital Employed = Total Assets - Current Liabilities” or “Capital Employed = Non-Current Assets + Working Capital.“read more