How do you calculate the return on assets employed (ROAE) from financial statements?
Learn how to calculate the return on assets employed (ROAE) from financial statements to assess the profitability of assets deployed in a business.
The Return on Assets Employed (ROAE) is a financial ratio that measures a company's profitability relative to its total assets. ROAE indicates how efficiently a company generates profits from the assets it employs. To calculate ROAE from financial statements, follow these steps:
Step 1: Gather the Required Financial Data:
- You'll need data from both the income statement and the balance sheet.
- Net Income (NI): This can be found on the income statement and represents the company's total profit after taxes.
- Total Assets (TA): This can be found on the balance sheet and represents the company's total assets at a specific point in time.
Step 2: Calculate ROAE Using the Formula:
The formula for ROAE is:
ROAE = (Net Income / Total Assets) x 100
Divide the Net Income by the Total Assets and multiply the result by 100 to express the ratio as a percentage.
Step 3: Interpret the Result:
- The resulting ROAE percentage represents the return on assets employed. A higher ROAE indicates that the company is generating more profit per dollar of assets, which is generally favorable.
Example:Suppose Company XYZ has a Net Income of $500,000 and Total Assets of $5,000,000.
ROAE = ($500,000 / $5,000,000) x 100 = 10%
In this example, Company XYZ has a ROAE of 10%, meaning it generates a 10% return on the assets it employs. This indicates that for every dollar of assets, the company earns 10 cents in profit.
It's important to note that ROAE should be considered in the context of the industry and compared to peer companies to provide meaningful insights into a company's performance. A higher ROAE is generally favorable, but it can vary depending on the industry and the company's specific circumstances. Additionally, trends in ROAE over time can be informative when assessing a company's profitability and asset utilization.
Calculating Return on Assets Employed (ROAE) Using Financial Statements.
To calculate Return on Assets Employed (ROAE) using financial statements, you will need the following information:
- Net income
- Average total assets
Net income can be found on the income statement, and average total assets can be calculated by adding the beginning and ending total assets balances from the balance sheet and dividing by two.
Once you have this information, you can use the following formula to calculate ROAE:
ROAE = Net income / Average total assets
ROAE is expressed as a percentage, so you will need to multiply the result by 100.
Example:
A company has net income of $100 million and average total assets of $500 million. Its ROAE is 20%.
ROAE = $100 million / $500 million = 20%
ROAE is a profitability ratio that measures how efficiently a company is using its assets to generate profit. A higher ROAE indicates that the company is more efficiently using its assets.
ROAE can be used to compare companies within the same industry, as well as to track a company's performance over time. It is important to note that ROAE can be affected by a number of factors, such as the company's accounting policies and the industry in which it operates.
Here are some additional tips for calculating and interpreting ROAE:
- When calculating average total assets, be sure to use the average of the beginning and ending total assets balances. This will give you a more accurate picture of the company's asset base over the period of time being analyzed.
- ROAE can be compared to other profitability ratios, such as return on equity (ROE), to get a better understanding of how the company is performing.
- It is important to compare ROAE to other companies within the same industry, as ROAE can vary significantly from industry to industry.
- ROAE should be tracked over time to identify any trends in the company's profitability.