# How to Calculate Return on Assets

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Return on assets is a measure of a company's profitability. In investing, the return on assets ratio provides a snapshot of how much profit a company is able to keep from every dollar it makes in sales. It's important because it helps show whether a company is using its money wisely. Here's how to calculate it.

The equation for calculating return on assets looks like this: Net income divided by total assets. You can find both these numbers in a company's annual report.

For this example, we'll use Microsoft's 2007 annual report. The company lists its net income (found on the income statement) as \$14.1 billion, and its total assets (found on the balance sheet) as \$40.2 billion. So the math looks like this: \$14.1 billion / \$40.2 billion = 0.351. Move the decimal point two places to the right, and you get a return on assets of 35 percent.

So what does this number mean? Well, a higher ROA is better, because it means a company is making more money on less investment (assets). For example, if Microsoft's total assets were \$80 billion while its net income remained the same at \$14.1 billion, its ROA would be 18 percent. In that scenario, Microsoft would have spent almost twice the money (\$80 billion compared to \$40.2 billion) to achieve the same amount of income (\$14.1 billion) -- thus, its return on assets would be much lower.

#### Tips

• Average return on assets varies widely by industry. Make sure you look at the average ROA for an industry at large when you are interpreting your results.

#### Warnings

• If you're comparing ROA between companies, make sure they are in the same industry. The ROA of a software company such as Microsoft and the ROA of a shoe company such as Crocs, for example, will be very different because of the nature of their businesses. Always compare apples to apples.