What is 'Return On Total Assets - ROTA'
The return on total assets (ROTA) is a ratio that measures a company's earnings before interest and taxes (EBIT) against its total net assets. The ratio is considered to be an indicator of how effectively a company is using its assets to generate earnings before contractual obligations must be paid.
BREAKING DOWN 'Return On Total Assets - ROTA'
To calculate ROTA:
The greater a company's earnings in proportion to its assets (and the greater the coefficient from this calculation), the more effectively that company is said to be using its assets.
To calculate ROTA, you must obtain the net income figure from a company's income statement, and then add back interest and/or taxes that were paid during the year. The resulting number reveals the company's EBIT. The EBIT number should then be divided by the company's total net assets (total assets less depreciation and any allowances for bad debts) to reveal the earnings that company has generated for each dollar of assets on its books.
The ROTA, expressed as a percentage or decimal, provides insight into the how much money is generated from each dollar invested into the organization. This allows the organization to see the relationship between its resources and its income, and it can provide a point of comparison to determine if an organization is using its assets more or less effectively than it had previously.
In circumstances where the company earns a new dollar for each dollar invested in it, the ROTA is said to be one, or 100%.
Return on Total Assets and Shifts in Asset Value
Over time, the value of an asset may diminish or increase. In the case of real estate, the value of the asset may rise over time. On the other side, most mechanical pieces of a business, such as vehicles or other machinery, generally depreciate over time as wear and tear affects their value.
Loaned Money and Return on Total Assets
If a debt was acquired to gain an asset, the ROTA can be adjusted to reflect the asset's functional value while accounting for the interest rate currently being paid to a financial institution. For example, if an asset was acquired with funds from a loan with an interest rate of 5%, and the return on the associated asset was a gain of 20%, then the adjusted ROTA would be 15%.
Since many newer companies have higher amounts of debt associated with their assets, these adjustments may make the business look less attractive in the eyes of investors. Once those debts begin to clear, the ROTA will appear to improve accordingly.