In around two minutes you will know what is Return on Total Assets. You will get both professional definition and easy explanation. No intro, no outro, straight to the point.
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Return on Total Assets is the profitability ratio that estimates the ability of a company to produce operating earnings by looking at how effectively assets are used.
Similar profitability ratios would be return on assets, return on equity, and return on investments. And if you are not sure what some of them mean, feel free to watch my other videos.
The formula of return on total assets is extremely simple. And it is earnings before interest and taxes, or EBIT, divided by average total assets. The result is the percentage value.
EBIT can be found on the income statement, and total assets can be found on the balance sheet.
Return on total assets is a little bit different from return on assets. The main difference is that return on assets uses net income as a numerator in its formula instead of EBIT.
Return on assets focuses on the ability of a company to produce net income, while return on total assets focuses on the ability to produce operating earnings.
And these are the earnings that are not affected by interest payments or taxes. For this reason, return on total assets might be more suitable when comparing companies from different regions.
Because different countries and states might have different interest rates and tax rules.
Investors obviously prefer companies with higher return on total assets. Which means that this company uses its assets effectively and maximizes earnings.
For example, if Company’s return on total assets is 15%, it means that this company was able to produce 15 cents of earnings before interest and taxes on every single dollar of assets that they own.
And even though ROTA allows to compare companies from different regions, it is still better to use it when comparing companies from the same industries.
And the reason for this it is because different industries might have different acceptable standards of financial health.
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*None of this is meant to be construed as investment advice, it's for entertainment purposes only. Links above include affiliate commission or referrals. I'm part of an affiliate network and I receive compensation from partnering websites. The video is accurate as of the posting date but may not be accurate in the future.
