The Return on Total Assets ratio is similar to the Asset Turnover Ratio in that both measure how effective a business's assets are in generating returns for the business. But while the asset turnover ratio is focused on the business's sales, return on assets is focused on net income. Sales is a measure of how much money the company can generate while net income is a measure of how much the business earns after its pays all of its financial obligations.
A Sample Income Statement
Expenses are listed on a company's income statement.
Return on Total Assets
Return on total assets equals the total net income the business earns in a given accounting period divided by the average value of the business's total assets for the same period. You calculate the average value of the total assets by adding the value of the business's total assets at the beginning of the period and the value of the business's total assets at the end of the period. You then divide the sum by two.
Return on Total Fixed Assets
Return on Total Fixed Assets equals the business's net income divided by the average value of the business's total fixed assets for the accounting period. You calculate the average value of the business's fixed assets by adding the value of the business's total fixed assets at the beginning of the accounting period to the value of the total fixed assets at the end of the period. You then divide the sum by two.
Using Return on Assets to Assess Company Performance
The greater the value of the ratio, the better a company is performing. However, merely determining a business's return on asset ratio is insufficient to get a good understanding on how a business is doing. To accurately gauge a company's performance, you need to put the value in context. This is generally done by comparing the current return on assets ratio to the company's past performance or to a competitor's ratio.