What Is Return on Average Assets?

Malcolm Tatum

A return on average assets (ROAA) is a calculation used to determine the level of profitability that is received from the various average assets owned by an organization or individual. The purpose for this type of assessment is to allow the owner to evaluate the benefits associated with holding those assets, and decide if the returns are sufficient to merit continuing to hold onto then. In the event that the return on average assets is not considered sufficient, there is a good chance the owner will choose to sell off some of those assets and replace them with other holdings that are more likely to increase the overall return on the total assets in the portfolio.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

The calculation of a return on average assets is somewhat similar to that of calculating a return on assets (ROA). The difference is that the scope of the calculation is broader, since the process will include consideration of all types of average assets held by the investor or owner. This means that such diverse assets as equipment, real estate, stocks, bonds, and even alternative investments like jewelry or art will be included in the calculation.

The basis for calculating the return on average assets focuses on the original cost of the cumulative assets versus their current total value. Typically, this is expressed as a percentage and will be directly related to a specific period of time, such as a calendar year or possibly even on a quarterly basis. By periodically making this type of assessment, the owner can determine if there has been an increase on the rate of return for those assets, if the overall value seems to be holding, or if there has been some sort of decrease. Based on the outcome of the calculation, the owner can decide what action, if any, should be taken in order to protect his or her financial stability.

A return on average assets is often helpful from the perspective of being able to see beyond events that affect the value of the individual assets during the period under consideration and reacting only to those specific events. This can allow time for any adverse events to be overcome as the period progresses, possibly to the point that the problems are resolved and the return on average assets shows little to no change from previous periods. From this perspective, the ROAA can provide the opportunity to consider holdings over a longer term rather than focusing on and reacting to events that occur in the short term in a manner that could, over time, actually be detrimental.

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