EXCEL: Calculating ROA and ROE

 Calculating return on assets

Return on assets (ROA) is a measure of how efficiently a business is using its assets to generate income. For example, a company with a higher ROA can generate the same profit as one with a lower ROA using fewer or cheaper assets.

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To compute ROA, divide the profits for a period of time by the average of the beginning and ending total assets. Figure 15.5 shows a simple balance sheet and income statement and the resulting ROA.

=G15/AVERAGE(C12:D12)

The numerator is simply the net profit from the income statement. The denominator uses the AVERAGE function to find the average total assets for the period.

Calculating return on equity

Another common profitability measure is return on equity (ROE). An investor may use ROE

to determine whether their investment in the business is being put to good use. Like ROA,

ROE divides net profit by the average of a balance sheet item over the same period. ROE,

however, uses average total equity rather than average total assets. 

The formula to calculate

ROE from Figure 15.5 is as follows:

=G15/AVERAGE(C25:D25)

Now you know how to compute ROA and ROE using Excel.