What Is After-Tax Return on Assets?
After-Tax Return on Assets (ROA) is a financial ratio used to measure after-tax income earned by a company from its assets.
Understanding After-Tax Return on Assets
After-tax ROA compares after-tax income to average total assets (ATA) and is expressed as a percentage. A company that earned $100 of after-tax income on $400 of ATA would have a 25% After-tax ROA. The formula is: After-Tax ROA = (After-Tax Income ÷ ATA) x 100.
After-tax income is the income left after revenues are reduced by expenses, deductions, and taxes. However, after-tax income is an umbrella term covering after-tax income computed to include or exclude different items of income, expense, deduction or taxes. After-Tax ROA measures performance. After-tax ROA computed with net income measures performance broadly. After-tax ROA computed with fine-tuned after-tax income measures aspects of performance delineated by specific income items chosen by you. Examples of fine-tuned after-tax income are Net Income (NI), Net Operating Profit After Taxes (NOPAT), and Net Income After Taxes (NIAT). Let’s deconstruct them to see how their income differs and how these differences impact the metric measured by After-tax ROA.
After-Tax ROA computed using Net Income
Net income (NI) is a broad spectrum after-tax income useful to you, as company president, to evaluate the overall efficiency of your company’s total investment in assets at generating net income. The computation is: After-Tax ROA = (NI ÷ ATA) x 100.
After-Tax ROA computed Using NOPAT
Net Operating Profit After Taxes (NOPAT) is core operating income, net of taxes. NOPAT excludes income earned from debt-financed assets. NOPAT is useful to you, as company manager, to assess the operating efficiency of the assets at generating after-tax operating income. NOPAT is useful to you, as company shareholder, to measure after-tax profit generated by equity-finance assets. NOPAT can be computed using earnings before interest and taxes (EBIT) adjusted to remove the tax shield benefit (i.e., add back tax expense reduced by interest payments made on company debt). The computation is: After-Tax ROA = (NOPAT ÷ ATA) x 100 = [EBIT x (1-Tax Rate)] ÷ ATA x 100.
After-Tax Income computed using NIAT
Net Income After Taxes (NIAT) is the sum of all revenues minus all expenses, including the cost of goods sold, depreciation, interest, and taxes. NIAT is found on the Income Statement’s last line. NIAT is useful to you, as a company competitor, because it is the company’s bottom line. The computation is: After-tax ROA = (NIAT÷ ATA) x 100. As a competitor comparing companies or industries, you may find NIAT a more useful measure as a percentage of total sales. The computation is: After-Tax ROA = Net Profit Margin x Asset Turnover = (Net profit ÷ Revenue) x (Sales ÷ Assets) = (NIAT ÷ Revenue) x (Sales ÷ Assets). As a company manager seeking to optimize operating performance, you can use NIAT to check the Operating Cycle’s impact on after-tax economic profitability. The computation is: After-Tax ROA = Return on Sales x Asset turnover = (NIAT ÷ Sales) x (Sales ÷ Assets) = [(EBIT x (1-T))] ÷ Sales x (Sales ÷ Assets).
Compare After-Tax ROA to a Benchmark
Remember, after-tax ROA has meaning only in context. It must be compared to the performance of a benchmark such as historical company, competitor or industry after-tax ROA(s) or trends. An after-tax ROA higher and trending upward faster than a benchmark signals that the assets efficiently generate after-tax income better and with quicker increasing efficiency than the benchmark.