### Student Question

“Hi Nathan,

Can you please illustrate further how the ROA [Return on Assets] was calculated in this question?”

– Jason

### MCQ – Return on Assets

Anderson Cable wishes to calculate their return on assets (ROA). You know that the return on equity (ROE) is 12% and that the debt ratio is 40%. What is the ROA?

A. 4.8%

B. 12%

C. 7.2% (*correct*)

D. 20%

**Correct answer: (C) **7.2%

### 1-on-1 CMA Coaching Support

Return on equity (ROA) formula= Net Income/Ave. Equity

Debt Ratio = Total Debt/Total Assets

To calculate the return on assets (ROA), we have to use both formulae:

ROA = ROE x (1 – Debt Ratio)

ROA = 12% x (1-40%)

ROA = 12% x 60%

ROA = **7.20%**

How did we arrive at the formula?

**First, we have to state the formula of ROA which is:**

ROA = Net Income/Total Assets

**Second, we have to extract the juice out of the given formula:**

Net Income/Total Assets = Net Income/Equity x (1 – Debt Ratio)

Net Income/Total Assets = Net Income/Equity x (100% – Total Debt/Total Assets) *-> In this case, the equity ratio is the remaining portion of the 100%.*

**Remember the accounting equation: Assets = Liabilities + Equity*

Net Income/Total Assets = Net Income/Equity x Equity/Total Assets -> *Therefore the equation can be restated as:
Assets (100%) = Liabilities (40%) + Equity (60%)*

Net Income/Total Assets = Net Income/~~Equity~~ x ~~Equity~~/Assets

Net Income/Total Assets = Net Income/Total Assets

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Below you’ll find an example of a mini-lesson that helped my student, Jason, understand how to calculate the return on assets (ROA).

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Until our next lesson,

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