Treasury Practice

Return on Total Assets

Published: Nov 2007

Return on Total Assets (ROTA), sometimes also referred to as Return on Assets (ROA), is a measure of how effectively a company uses its assets. It depicts the amount earned per unit of investment in assets and demonstrates how efficiently a company has employed its assets to generate returns. ROTA, expressed as a percentage, is calculated as follows:

\(\mathrm{ROTA}=\frac{Net\: income}{Total\: Assets}\)

In accounting terms it is calculated by dividing net income by average total assets. This is a better measure if there is a significant change in assets during the period under review.

The advantage of using ROTA as compared to ROE (Return on Equity) is that it also takes liabilities into account as the total assets figure is used regardless of whether they are financed by equity or debt. The credit rating agencies usually prefer ROTA over other measures when evaluating the profitability of a company.

ROTA and operational performance

A second method of calculating ROTA attempts to assess operational performance, rather than financial performance. Instead of using net income, the net profit before interest and taxes is compared to the assets that were employed to achieve this result. Using earnings before interest and taxes (EBIT) helps to eliminate the impact of non-operational items on the net income.

\(\mathrm{ROTA}=\frac{Earning\: before\: interest\: and\: taxes}{Total\: Assets}\)

ROTA calculated with the above formula can be used to compare the performance of companies which have different costs of borrowing as well as companies that are subject to different tax regimes. The higher the ROTA, the more earnings a company is making relative to its investment. As some industries are more capital intensive than others, the ROTA figures of companies in different industries can vary widely. Thus, it is important to compare ROTA values either of the same company over time or of similar companies over the same time period.

The divisions of a company will vary in terms of the assets deployed to carry out the business and ROTA is a good measure for comparing the performance of different divisions. As ROTA calculated using EBIT is unaffected by the financing structure it also makes more sense to use this measure to evaluate the relative performance of different divisions as the management of business divisions is typically not involved in financing decisions.

ROTA and sales

Another way of calculating ROTA is to multiply the Return on Sales with the asset turnover. Asset turnover measures the sales turnover produced by the use of the assets. This produces the same result by using two other measures of financial performance.

\(\mathrm{ROTA}={\mathrm{Return\: on\: Sales\:×\:Asset\: turnover}}=\frac{EBIT}{Sales}×\frac{Sales}{Total\: Assets}\)

The formula shows that management can influence ROTA by improving either the profit margin or the asset turnover. The profit margin may be improved by reducing costs or increasing revenues by price increases). Similarly, a reduction in the level of inventory or accounts receivable reduces working capital and increases ROTA. This ROTA formula may also reveal whether the company in question is a high profit margin, low volume or low profit margin, high volume producer. The disadvantage of this method is that sales may not be the best indicator of efficiency in every company.

ROTA is also used by companies internally to make investment decisions by estimating the potential change in the ratio under different investment options.

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