What is return on assets?

Definition

Return on assets is net income divided by total assets. On the books, this is a rate of leftover profit against the asset base, not a ledger account you debit.

A multi-location gym uses it to see what the floors, equipment, and cash produced after every cost. People often shorten the name to ROA after the full name.

It is not a Balance Sheet line. The books already hold leftover profit and the assets; this reading restates them as a percent.

Stay with leftover profit against assets when you read it. Revenue per dollar of assets is a different page.

Where it shows up

P&L: Related to net income.

Balance Sheet: Related to total assets.

Cash flow: Related to whether that return showed up as cash.

See also: Net Income · Assets · Asset Turnover

When you look at your Income Statement, take net income, the bottom leftover after every expense. Then divide by average assets from the Balance Sheet, usually the start-of-period and end-of-period totals added and halved.

When the percent is high, the asset base produced more leftover profit. When it is low, a large pile of equipment, buildout, and cash produced little leftover.

The Balance Sheet holds the denominator. Fixed assets such as equipment and leasehold buildout often dominate a gym's total.

On the Statement of Cash Flows, leftover profit and cash from operations can diverge. This page stays on the earnings rate, which can look healthy while dues sit uncollected.

How it works

Start with net income for the period. That leftover already subtracted operating costs, interest, and taxes.

Divide by average assets for the same window. Using only the year-end total can distort the rate if the gym bought a second location in December.

$40,000 of net income against $500,000 of average assets is 8 percent. Write it as a percent so the rate is easy to compare across years.

Stay with leftover profit in the numerator. Swapping in revenue turns this into asset turnover, a different page.

Net margin is leftover profit as a percent of revenue. This page is leftover profit as a percent of assets, so a thin margin on a small asset base can still read well.

Do not treat a high percent as proof the cash is in the till. Net income can sit in unpaid membership dues while the equipment was paid in cash last year.

Adding a third location raises assets immediately and raises leftover profit only as the new floor fills. The rate often dips in the first months after a buildout.

This page stays on leftover against assets. How hard the assets work to produce sales, and leftover against equity only, belong on other pages.

Example

Iron District Gym runs two floors and holds $500,000 of average assets for the year. Net income is $40,000.

Divide: $40,000 by $500,000. ROA is 8 percent.

That 8 percent is leftover profit against the asset base. It is not how many sales dollars each dollar of assets produced.

If the gym buys $100,000 of new equipment late in the year and leftover profit stays $40,000, average assets rise and the rate falls. The floors got heavier before they got more profitable.

If leftover profit rises to $50,000 on the same $500,000 of assets, the rate is 10 percent. The asset base did not change; the leftover did.

If half of that leftover is still sitting in unpaid dues, the Income Statement rate can still be 8 percent. The cash reading would be lower until those dues clear.

The gym does not post a line that says this rate. The books already hold net income and the assets; you divide.

Common mix-ups

This rate is not the same as asset turnover. Asset turnover is revenue against assets; this page is leftover profit against assets.

This rate is not the same as return on equity. Return on equity divides leftover profit by equity only, so a shop funded with debt can read higher there than here.

This rate is not the same as cash in the till. An 8 percent reading can sit in unpaid dues while last year's equipment is already paid for.

Related terms

• Net Income: What is left from revenue after every expense, including interest and taxes, is subtracted.
• Assets: Everything the business owns or controls that carries future economic value.
• Asset Turnover: Revenue generated per dollar of assets held.
• Return On Equity: Net income measured against owner equity.
• Balance Sheet: A statement showing what a business owns, what it owes, and what is left for owners at a single point in time.
• Net Margin: Net income as a percentage of revenue.
• Return On Invested Capital: Operating profit measured against the debt and equity funding the business.
• Fixed Assets: Long-lived physical assets used to run the business rather than resold.