Chapter 15: Using Formulas for Financial Analysis
15
Calculating return on assets
Return on assets (ROA) is a measure of how efficiently a business is using its assets to gen-
erate income. For example, a company with a higher ROA can generate the same profit as
one with a lower ROA using fewer or cheaper assets.
To compute ROA, divide the profits for a period of time by the average of the beginning and
ending total assets. Figure 15.5 shows a simple balance sheet and income statement and the
resulting ROA.
=G15/AVERAGE(C12:D12)FIGURE 15.5
A return on assets calculation
The numerator is simply the net profit from the income statement. The denominator uses
the AVERAGE function to find the average total assets for the period.
Calculating return on equity
Another common profitability measure is return on equity (ROE). An investor may use ROE
to determine whether their investment in the business is being put to good use. Like ROA,
ROE divides net profit by the average of a balance sheet item over the same period. ROE,