Return on Average Assets (ROAA)

What ROAA measures

Return on Average Assets (ROAA) assesses how efficiently a company uses its assets to generate profit. It is commonly used for banks and other financial institutions but is applicable across industries. ROAA smooths asset fluctuations over a reporting period by using average assets rather than a single-point asset balance.

Key takeaways

  • ROAA = Net Income ÷ Average Total Assets.
  • Average assets = (Beginning Assets + Ending Assets) / 2, using the same period as net income.
  • ROAA is most useful when comparing similar companies in the same industry.
  • Results vary by industry; firms with large upfront asset investments typically show lower ROAA. A rough benchmark is that 5% or higher is generally considered good, though this depends on industry norms.

Formula and components

ROAA = Net Income / Average Total Assets

Where:
Net income — from the income statement for the same period as the assets.
 Average Total Assets — typically calculated as (Beginning Period Assets + Ending Period Assets) / 2, using balances from the balance sheet.

Why use average assets

Balance sheets are snapshots at a point in time and can miss intra-period changes. Averaging beginning and ending asset balances smooths volatility and provides a more accurate measure of asset efficiency over the period for which net income is reported.

Worked example

Company A:
* Net income for Year 2 = $1,000
Assets at end of Year 1 = $5,000
 Assets at end of Year 2 = $15,000
Average assets = (5,000 + 15,000) / 2 = $10,000
ROAA = 1,000 / 10,000 = 10%

If you used only Year 1 assets, ROA would be 20% (1,000 / 5,000). Using only Year 2 assets gives 6% (1,000 / 15,000). Averaging avoids misleading results from growth or seasonal changes in asset balances.

ROAA vs. ROA and ROTA

  • ROAA vs. ROA: If ROA uses average assets, ROA and ROAA are the same. If ROA uses a single-point asset balance (beginning or ending), ROAA (which uses average assets) is generally more accurate.
  • ROAA vs. ROTA (Return on Total Assets): Both use average total assets in the denominator, but ROTA uses EBIT (earnings before interest and taxes) in the numerator, while ROAA uses net income.

Interpreting ROAA

  • Compare ROAA to industry peers and historical company figures rather than using a universal cutoff.
  • Low ROAA can indicate heavy capital investment or underutilized assets; high ROAA suggests effective asset use or a lighter asset base.
  • For banks and financial institutions, ROAA is a standard profitability metric; for asset-intensive manufacturers, lower ROAA may be normal.

Limitations

  • ROAA can be distorted by one-time gains/losses in net income or by significant asset revaluations.
  • It does not reflect differences in financing (debt vs. equity) or capital structure.
  • Industry differences make direct comparisons across sectors misleading.

Conclusion

ROAA is a straightforward ratio that links net income to the asset base, offering a useful measure of asset efficiency when calculated with average assets and interpreted in the context of industry norms and company-specific circumstances.