Return on Assets

Return on Assets in Hospitals and Health Systems

Return on assets (ROA) relates the surplus or profit a health care organisation earns in a year to everything on its balance sheet, including buildings, equipment, stocks, money owed to it and cash. Because the denominator counts assets however they were financed, the ratio judges how hard the whole asset base is working, with borrowing entering only through the interest charged against net income. Health care is asset heavy, and in public systems much of the estate is paid for by the state, so ROA is one of the few measures that sets hospital buildings and equipment against what they produce financially. ROA calculated from an NHS trust's published accounts can move by several percentage points depending on which surplus line and which asset values are used.

What sits in a provider's asset base

Total assets combine non-current assets, held for more than a year, with current assets. For a hospital the non-current side is dominated by land, buildings and medical equipment, plus right-of-use assets for leased property under the leasing standard IFRS 16. The current side holds inventories, receivables and cash.

The balance sheet of Wye Valley NHS Trust at 31 March 2026 shows the typical shape. Non-current assets were GBP 184.7 million, of which property, plant and equipment made up GBP 169.9 million, and current assets were GBP 83.6 million, so total assets were GBP 268.2 million and property, plant and equipment about 63% of the total. The trust accounts for PFI schemes meeting the IFRIC 12 definition of a service concession on its statement of financial position, so the PFI redevelopment of Hereford County Hospital counts as a trust asset.

Calculating ROA and the choice of numerator

The usual form divides net income for the year by the average of opening and closing total assets. Dahlquist and Knight, in the OpenStax Principles of Finance textbook, define the ratio this way and describe it as a measure of a company's ability to use its assets to generate a profit. Bai and colleagues, studying US health care companies, also average opening and closing balances to reduce noise from movements in balance sheet accounts during the year.

$$ROA = \frac{NI}{\bar{A}}, \qquad \bar{A} = \frac{A_{0} + A_{1}}{2}$$

where $NI$ is net income for the period after all operating costs, interest and tax, $A_{0}$ and $A_{1}$ are total assets at the start and end of the period, and $\bar{A}$ is average total assets.

In a not-for-profit or public provider the numerator is the surplus or deficit for the year. Some analysts add interest, and for an NHS trust the PDC dividend, back to the numerator so that the result does not depend on how the assets were financed, which makes comparison fairer between a hospital funded by loans and one funded by public capital. Any comparison needs the same definition for every organisation and year.

Margin times turnover

ROA splits exactly into a profit margin and an asset turnover ratio. The split shows whether a low return reflects thin margins on each pound of income or a large asset base relative to activity.

$$\frac{NI}{\bar{A}} = \frac{NI}{R} \times \frac{R}{\bar{A}}$$

where $R$ is total operating revenue or income for the period, $NI/R$ is the profit margin and $R/\bar{A}$ is total asset turnover, the income generated for each pound of assets. Multiplying ROA by the ratio of assets to equity gives return on equity, which is where most of the effect of borrowing enters.

Turner and colleagues applied this framework to 3,255 US short-term acute care hospitals with Medicare cost report data between 2007 and 2011. On average each US dollar of assets, measured at book value, generated US 1.22 dollars of revenue, and hospitals kept about five cents of each revenue dollar after all expenses. Efficiency in turning assets into revenue was inversely related to size, so the smallest hospitals had the highest turnover but the thinnest margins.

Bai and colleagues argue that profit margin alone misleads in comparisons between health care industries, because asset turnover differs widely between, for example, drug companies and insurers.

How asset values shape the ratio

The denominator is an accounting value, and different valuation rules give different ratios for the same hospital. US hospital studies such as Turner and colleagues use book values, which reflect historical cost less depreciation, so an old and heavily depreciated estate gives a small denominator and a flattering return.

NHS providers in England prepare accounts under the Department of Health and Social Care (DHSC) Group Accounting Manual. The 2025/26 accounting policies of Wye Valley NHS Trust, prepared under that manual, value operational land and property at current value in existing use. Specialised buildings with no active market are valued at depreciated replacement cost on a modern equivalent asset basis, while IT, furniture and plant are held at depreciated historic cost. Revaluation gains go to the revaluation reserve unless they reverse an earlier loss charged to expenditure, so a revaluation raises the denominator without passing through the surplus in that year, although the PDC dividend and later depreciation rise with it. ROA for an NHS trust is therefore not directly comparable with ROA for a US hospital on historical cost.

Assets and the cost of capital in the NHS

The DHSC guidance under section 42A of the National Health Service Act 2006 requires providers to pay a public dividend capital (PDC) dividend of 3.5% on actual average relevant net assets during the financial year. Relevant net assets start from total PDC and reserves and then deduct the net book value of donated and grant-funded assets, charitable funds and average daily cleared balances held with the Government Banking Service or National Loans Fund. Relief for assets under construction is at DHSC discretion and targeted at large nationally directed schemes, and the guidance states that operational assets will not be eligible. Liabilities are netted off, so the base sits closer to equity than to total assets, but an operational building that is not donated, grant funded or matched by borrowing adds to the charge.

The Naylor review of NHS property and estates, published in March 2017, listed this 3.5% annual cost of capital, charged on book values, among the financial incentives meant to lead providers to release surplus land. The review found that providers had tended to hold on to land until they needed funds for new facilities, and that rising property prices had encouraged them to keep appreciating assets. It judged that raising the charge or charging more on surplus land would, alone, be unlikely to shift behaviour at the scale required. An idle site therefore lowers ROA twice, by inflating the denominator and by adding to the dividend that reduces the surplus, which makes the opportunity cost of holding the estate visible in the accounts.

Reading ROA from a published NHS trust account

The Wye Valley accounts for 2025/26 show how far the numerator choice can move the ratio. Total assets were GBP 238.6 million at 31 March 2025 (GBP 171.4 million non-current plus GBP 67.2 million current) and GBP 268.2 million a year later, so average total assets were (238.6 + 268.2) / 2 = GBP 253.4 million. The trust reported a surplus for the year of GBP 16.5 million after PDC dividends payable of GBP 3.1 million.

On that surplus, ROA is 16.5 / 253.4 = 0.065, or 6.5%. Total operating income was GBP 421.4 million, so the margin is 16.5 / 421.4 = 0.0392 and turnover is 421.4 / 253.4 = 1.663, and 0.0392 × 1.663 = 0.065. The trust's adjusted financial performance, which removes net impairment reversals and the effect of capital grants and donations and restates its PFI scheme on the former UK GAAP basis, was a surplus of GBP 2.7 million, giving 2.7 / 253.4 = 0.011, or about 1.1%. Its breakeven duty surplus of GBP 11.03 million gives 11.03 / 253.4 = 0.0435, or about 4.4%. The same balance sheet supports a return of about 1% or about 6.5%, and the gap comes from accounting adjustments rather than from patient care.

Worked example with surplus land and a revaluation (illustrative)

All figures in this example are illustrative. A hospital trust has operating income of GBP 520 million and a surplus after its PDC dividend of GBP 10 million. Total assets are GBP 380 million at the start of the year and GBP 420 million at the end, and a vacant site with a book value of GBP 30 million sits within both balances and within relevant net assets.

1. Base ratio. Average total assets are (380 + 420) / 2 = 400 million, so ROA is 10 / 400 = 0.025, or 2.5%. The margin is 10 / 520 = 0.01923 and turnover is 520 / 400 = 1.30, and 0.01923 × 1.30 = 0.025.

2. The cost of the vacant site. Excluding the site, average operational assets are 400 − 30 = 370 million and the return on them is 10 / 370 = 0.0270, or 2.70%. The site also adds 30 × 0.035 = GBP 1.05 million to the PDC dividend each year.

3. Selling the site. Suppose the site is sold at book value on the first day of the year and the proceeds are held with the Government Banking Service, ignoring interest. Cash replaces land, so total assets are unchanged, but the average cleared balance is deducted from relevant net assets and the dividend falls by GBP 1.05 million. The surplus rises to 10 + 1.05 = 11.05 million and ROA to 11.05 / 400 = 0.0276, or 2.76%.

4. A revaluation instead. Suppose instead that the site is kept and the main buildings are revalued upwards by GBP 40 million at the year end because modern equivalent rebuilding costs have risen. Average assets become (380 + 460) / 2 = 420 million. The gain goes to the revaluation reserve, but average relevant net assets rise by 40 / 2 = 20 million, adding 20 × 0.035 = GBP 0.7 million to the dividend. The surplus falls to 10 − 0.7 = 9.3 million and ROA to 9.3 / 420 = 0.0221, or 2.21%.

5. Interpretation. Services are identical in every step, yet ROA ranges between 2.21% and 2.76%. The sale improves the ratio because the cost of holding the asset falls, whereas the revaluation lowers it only because the same buildings are recorded at a higher value.

Reading ROA in health economics and policy

ROA is a financial ratio and should not be read as a measure of economic efficiency. Technical efficiency asks whether outputs such as treated patients or health gain are produced with the fewest inputs, and frontier methods such as data envelopment analysis compare providers on that basis. ROA mixes the prices a provider is paid with its costs and book asset values. Under activity-based funding or other forms of provider payment, a higher tariff raises ROA without any change in how care is delivered, so the ratio says as much about payment rates as about management.

Lenders and regulators use ROA in benchmarking to ask whether a provider's surplus can sustain and replace its estate. For a decision about a new building or service, an economic evaluation values the capital through its capital cost, annuitised at a discount rate, rather than through the organisation's historical ROA.

Boundaries with nearby ratios

Return on equity measures the return to owners and is driven by gearing as well as by margin and turnover, whereas ROA counts all assets whoever financed them, although the interest deducted in its numerator still carries some effect of borrowing. Return on investment is normally computed for one project or programme. A liquidity ratio tests whether short-term obligations can be met, and a trust with a healthy ROA can still be short of cash.

Limitations and common misreadings

Most errors with ROA come from forgetting that both halves of the ratio rest on accounting choices. Each of the following can move the figure without any change in care.

1. Mixing surplus definitions. Reported, adjusted and breakeven duty surpluses can differ by several percentage points of ROA for the same trust in the same year.
2. Comparing valuation regimes. Historical cost, current value and modern equivalent asset valuations give different denominators for identical buildings.
3. Treating a low ROA as waste. Spare emergency capacity and teaching facilities tie up assets that earn little surplus, yet both are part of what the health system pays for.
4. Ignoring assets off the balance sheet. Operating leases before IFRS 16 and some private finance arrangements kept assets out of the denominator and flattered the ratio.
5. Reading the ratio as value for money. ROA says nothing about health gain, and a high surplus may mean payers are charged more than costs justify.

Sources

• Bai G, Rajgopal S, Srivastava A, Zhao R. Profitability and risk-return comparison across health care industries, evidence from publicly traded companies 2010-2019. PLOS ONE. 2022;17(11):e0275245. https://doi.org/10.1371/journal.pone.0275245
• Dahlquist J, Knight R. Principles of Finance. OpenStax, Rice University; 2022. Section 6.6, Profitability ratios and the DuPont method. https://openstax.org/books/principles-finance/pages/6-6-profitability-ratios-and-the-dupont-method
• Department of Health and Social Care. Secretary of State's guidance under section 42A of the National Health Service Act 2006 (Finance available to NHS trusts and foundation trusts). Published 21 October 2014, last updated 10 February 2025. https://www.gov.uk/government/publications/guidance-on-financing-available-to-nhs-trusts-and-foundation-trusts/secretary-of-states-guidance-under-section-42a-of-the-national-health-service-act-2006
• Naylor R. NHS Property and Estates: Why the estate matters for patients. An independent report for the Secretary of State for Health. Department of Health; March 2017. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/607725/Naylor_review.pdf
• Turner J, Broom K, Elliott M, Lee JF. A decomposition of hospital profitability, an application of DuPont analysis to the US market. Health Services Research and Managerial Epidemiology. 2015;2:2333392815590397. https://doi.org/10.1177/2333392815590397
• Wye Valley NHS Trust. Annual accounts for the year ended 31 March 2026. Statement of Comprehensive Income, Statement of Financial Position, Note 1 (accounting policies) and Note 36 (adjusted financial performance). https://www.wyevalley.nhs.uk/media/1574987/wye-valley-nhs-trust-annual-accounts-31st-march-2026.pdf