ROA Vs. ROI Formulas
Return on Assets (ROA) and Return on Investment (ROI) are two measures of financial performance used by businesses and investors. Both metrics can provide insight into how financial investment decisions contribute to or detract from the success of an enterprise, but each sheds light on a different aspect of performance. Using both metrics together can provide greater insight than using one by itself, although each is suited to a slightly different purpose. Understanding the formulas for ROA and ROI, as well as the insights gained through each, can help you to use both metrics to keep a tighter control on the finances of your business.
As a simple ratio, ROA requires only two inputs: net income and average total assets for the period. Average total assets can be more challenging to quantify than net income, but the task can be simplified if you keep detailed accounting records. Using any interval of your choice (weekly, daily or monthly, for example), note the total value of your business assets at each interval, then divide by the number of intervals used in the calculation to arrive at the average total assets.
Use the following formula to calculate Return on Assets:
ROA = Net Income / Average Total Assets
Return on Investment can be thought of as the ratio of earnings to an investment expense that contributed to the earnings. First, determine the cost of the investment in question, which should be easy to obtain through receipts or your accounting records. Next, determine your top-line earnings at the point in time at which you wish to analyze the ROI of the investment.
Use the following formula to calculate Return on Investment:
ROI = (Earnings - Initial Investment) / Initial Investment
Business assets should contribute in some way to the performance of an organization. Return on Assets is a way to hold your business accountable to that basic fact, by analyzing the value of your assets compared to your net income. If your ROA figure is lower than others in your industry, it can be a sign that you are not putting your assets to the best use, and that you may be wasting money by investing in assets that do not add productive value. A higher ROA can prove that you use assets very efficiently, and that your purchases are making contributions to your bottom line.
Return on Investment is used to determine the incremental impact on earnings that a specific investment achieves. Investments are always made for the purpose of increasing business results, and ROI is a way to both ensure that an investment is profitable and measure exactly how profitable it is. The main advantage of this metric is the insight it provides into exactly how well an investment is performing. With this data in hand, you can make a more informed decision whether to repeat, continue, cease or alter any investment that you make.