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What is the Return on Assets ratio, also called the Return on Investment ratio?

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Question: What is the Return on Assets ratio, also called the Return on Investment ratio?
Answer:

The return on assets ratio is a profitability ratio which is a returns ratio. The return on assets ratio is also called the return on investment ratio. Return on assets allows the business owner to calculate how efficiently the company is using their total asset base to generate sales. Total assets include all current assets such as cash, inventory, and accounts receivable in addition to fixed assets such as plant and equipment.

The reason that the return on assets ratio is also called the return on investment ratio is because "investment" refers to the firm's investment in its assets.

Calculation of the Return on Assets Ratio

The calculation of the Return on Assets ratio is as follows:

Return on Assets = Net Income (Net Profit)/Total Assets = ______%

where Net Income comes from the income statement and Total Assets come from the balance sheet.

Interpretation of the Return on Assets ratio

In order to interpret the Return on Assets ratio, you need comparative data such as trend (time series) or industry data. The business owner can look at the company's return on assets ratio across time and also at industry data to see where the company's return on assets ratio lies. The higher the return on assets ratio, the more efficiently the company is using its asset base to generate sales.

The Return on Assets ratio is one of the key components of the Dupont Model in calculating Return on Equity.

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