Managers, investors and lenders use financial ratios to measure the health of a company. One set commonly used are the profitability ratios. These ratios show whether or not the company is generating earnings. Return on assets and return on total assets are profitability ratios used to find out how well a company manages assets to generate profits. Figures used to calculate the ratios typically are available on the company's financial statements.
Sometimes the acronyms ROA and ROTA are used interchangeably; however, the calculations vary slightly. ROTA is a measure of earnings on total net assets without considering payments for taxes and interest. The ROA ratio, on the other hand, measures earnings on total assets after the company pays taxes and interest for the year. To find the ROTA for a particular company, earnings before interest and taxes are divided by total net assets. Total net assets consists of total assets minus depreciation and bad debt allowance. Thus, the ratio is calculated as ROTA = EBIT/Total Net Assets. To convert the ratio to a percentage, multiply the answer by 100. The formula for figuring ROA is ROA = Net Income/Total Assets, although some investors add back interest payments to net income, to look at returns without considering debt.
The ROTA and ROA ratios are a reflection on management. They suggest to what level the company's managers are using the resources available to increase profits. Comparisons with companies in the same industry provide a better analysis of performance, because financial structures may differ in other sectors. In addition, comparing the current year ratios with that of preceding years for the same company will show if performance is improving or declining over time. The general business climate and economic conditions throughout the period also should be considered.
Comparing the average ROA across business sectors gives a better indication of what a particular type of company should achieve. For example, the technology sector posts the highest ROA at 10.67 percent, as of March 2015. Healthcare was second at 8.56 percent. Financials were at the bottom of the list, posting an ROA of less than 1 percent.
Tried and true means of increasing profitability will affect ROTA. For example, reducing expenses, increasing sales and improving efficiency across the board in day-to-day operations are means of improving profits. In addition, companies can study the competition if competitors' ROTA is greater than the average for the type of business. Learning the business practices of successful companies and incorporating these into daily operations can increase ROTA over time.