Question

The net income for a company is $210,000 for the year ended December 31, 2020.

The total assets of the company are $800,000 on January 1, 2020.
The ending total assets are $950,000 on December 31, 2020.
Given this information, what is the return on assets for this company and a possible interpretation?

Answer 1

The return on assets (ROA) is a measure of how efficiently a company is using its assets to generate profits. It is calculated as the net income divided by the average total assets over a certain period of time.

To calculate the ROA for the year ended December 31, 2020:

ROA = Net Income ÷ Average Total Assets = $210,000 ÷ ($800,000 + $950,000) ÷ 2 = $210,000 ÷ $875,000 = 0.24 or 24%

So, the return on assets for this company is 24%. This means that for every $1 of assets, the company generated 24 cents in net income.

A possible interpretation of this ROA is that the company is using its assets efficiently to generate profits, but there is room for improvement as a higher ROA would indicate that the company is generating more profits per dollar of assets