Return on Assets

A financial ratio calculated as net income divided by total assets, showing how efficiently an organisation uses its assets to generate profit.

Source: Brealey, Myers & Allen 2019

Return on assets is calculated by dividing net income by total assets, showing how much profit an organisation generates from each unit of resource it controls, regardless of how those resources were financed. Because the denominator includes assets funded by both debt and equity, the ratio reflects operating performance rather than financing choices. A higher figure indicates that assets are being used more productively to produce surplus. Zelman and colleagues (2020) set out its construction and interpretation for health organisations.

Source: Zelman et al. 2020

Return on assets indicates how effectively an organisation turns the assets it holds into profit, so a higher figure means more surplus is generated per unit of assets. It reflects both profitability and how intensively assets are used, so a low return may signal weak profitability or an asset base larger than the activity justifies. It allows organisations of different sizes to be compared on how well they employ their resources rather than on absolute profit.

Source: Brealey, Myers & Allen 2019

In health care it is used to assess how well providers use their assets, such as buildings and equipment, to generate the surplus needed for sustainability and investment. Managers and funders use it to compare how productively organisations employ their resources and to track performance over time. In public or non-profit settings, where profit is not the goal, it is read as an indicator of how effectively assets are used to deliver activity rather than to earn profit.

Source: Brealey, Myers & Allen 2019

Return on assets depends on how income and assets are valued, and asset values on the books may not reflect current worth, which distorts the ratio, particularly where assets are old or revalued. It can be affected by one-off items in income, and what counts as an adequate return varies by sector and by how asset-intensive an activity is. In non-profit health care, where surplus is not the aim, the measure must be interpreted with the organisation's purpose in mind.

Source: Brealey, Myers & Allen 2019

Return on assets relates profit to all the assets an organisation uses, regardless of how they are financed, whereas return on equity relates profit to the owners' capital alone. Return on assets shows how productively the whole asset base is used, while return on equity shows the return to owners, which is affected by how much of the assets are financed by debt. Comparing the two reveals the effect of borrowing on the return to owners.

Source: Brealey, Myers & Allen 2019