Return on Assets
Return on Assets measures the net income returned on each
dollar of assets. This ratio measures overall profitability from our investment
in assets. Higher rates of return are desirable. Return on Assets is calculated
as follows:
Net Income / Average Total Assets
EXAMPLE - Net Income is $ 60,000 and average total assets for
the year are $ 500,000. This gives us a 12% return on assets, $ 60,000 / $
500.000 = .12.
Return on Assets is often modified to ensure accurate
measurement of returns. For Example, we may want to deduct out preferred
dividends from Net Income or maybe we should include operating assets only and
exclude intangibles, investments, and other assets not managed for an overall
rate of return.
