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How to Calculate Return on Assets

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Part of the video series: Finance & Accounting Facts

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Summary: Calculate return on assets by dividing the net income by the average total assets in order to generate returns for the shareholders. Learn how to calculate the return on equity ratio with information from a certified public accountant in this free video on accounting.

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By Miranda Chook
eHow Presenter

Miranda Chook is a CPA with expertise in international operations. She has held executive positions with both publicly listed and privately held companies. In addition to her finance...read more

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"Hi, I'm Miranda Chook, a CPA. Ratios are a good way of analyzing a company's financial statements. We're going to talk about two of the more common ones in this segment. The first one is the return on assets, which is one indication of management's performance of how well it uses the company's assets to generate returns for the shareholders. The calculation is net income divided by average total assets. And average total assets can just be the beginning total assets plus ending total assets divided by two. The other common ratio that we're going to talk about in this segment is the return on equity, and this is calculated by taking net income and dividing it by average shareholder's equity. Again, you can take the balance at the beginning of the period for shareholder's equity, add the ending balance for shareholder's equity, and divide by two. Now, these ratios do need some context to be meaningful and actionable. So take a look at what they were in prior periods. Take a look at what the company's forecasting them to be for future periods. And also take a look at how other companies within the industry are doing in terms of those ratios as well."

eHow Article: How to Calculate Return on Assets