To a greater or lesser extent, all companies invest in assets, such as vehicles, machinery, buildings and furniture in order to generate an income. These assets assist the business with their goal of making money. Businesses want to ensure that they get the most out of the assets they own. The return on assets KPI measures how efficiently a company is using its assets.

This KPI is particularly useful if it is used to compare to other companies in the same industry.

For this calculation you’ll need part of the income statement and part of the balance sheet. The t in the formula is a given period of time.

There are a couple of comments to make about this formula. First, we take the average value of the assets during the period of time (perhaps a year) instead of the value of the assets at the end of the year. Assets come and go, so we want a proper representation of the value of the assets by taking an average because revenues were earned throughout the year on varying levels of assets.

Secondly, we will add back the interest expenses to net income before calculating the ratio. Why? Companies can fund their assets through debt or equity. If you fund your assets through large amounts of debt, you increase you interest payments. To take the capital structure into account, add back the interest expense that was incurred due to purchasing assets.

Also, high interest payments are taxed differently than a company having low interest payments. ROA can only be calculated for companies making a profit.

For more information, The Main KPI Types has a list of some KPIs and their types.