Average total assets is an important financial metric that measures the average carrying value of all assets on a company’s balance sheet over a period of time. It allows us to evaluate how well a company is utilizing its asset base to generate sales and profits.
In this comprehensive guide, we will walk through the steps for calculating average total assets with examples. Whether you are an accounting student or financial analyst, this guide will equip you with the knowledge to accurately determine this key metric.
What are Average Total Assets?
Average total assets represent the average amount of assets a company holds over a set period, usually a year. It is calculated by adding the ending total assets from the past two year’s balance sheets and dividing by two. The formula is:
Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2
This measures the average level of investment a company has made in assets like cash, inventory, property, equipment etc. It helps evaluate how productively assets are being used to generate revenues and returns.
Why Calculate Average Total Assets?
Here are some reasons why average total assets is an important metric:
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It is used to calculate key financial ratios like asset turnover ratio and return on assets. These ratios gauge efficiency of assets use.
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It helps smooth fluctuations in asset levels over a year. Asset balances can vary each quarter or month due to seasonal factors.
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Provides a proxy for the average asset base available during a period. This is useful for ratio analysis.
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Allows meaningful comparisons of performance over time or against competitors.
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Changes in average total assets indicate the growth or contraction of a company’s operating scale and capital investment.
Step-by-Step Guide to Calculate Average Total Assets
Follow these steps to accurately calculate average total assets:
Step 1: Identify the Relevant Time Period
Average total assets are generally calculated on an annual basis. So you first need to determine the fiscal year or the 12-month period for which the metric will be calculated.
For example, if you want to evaluate asset productivity for FY 2019, identify the balances for 2018 and 2019 years.
Step 2: Obtain Total Asset Balances
Pull the total asset amounts from the balance sheet as of the beginning and ending period dates. These are usually the prior year and current year-end balances.
For our example, we will use:
Beginning total assets (Dec 31, 2018) = $250,000
Ending total assets (Dec 31, 2019) = $350,000
Step 3: Add the Beginning and Ending Total Assets
Sum the beginning and ending asset totals obtained from step 2 above.
Beginning total assets = $250,000
Ending total assets = $350,000
Beginning total assets + Ending total assets = $250,000 + $350,000 = $600,000
This gives us the combined total assets over the two year time period.
Step 4: Divide the Result by 2
Now take the total asset amount derived in step 3 and divide it by 2 to calculate the arithmetic average.
Total assets = $600,000
$600,000 / 2 = $300,000
This determines the average total assets figure for the year. Our average total assets for 2019 is $300,000.
And that’s it! By following these four steps, you can quickly calculate the average level of assets deployed by a company.
Examples of Average Total Assets Calculation
Let’s go through a few examples to solidify the calculation methodology:
Example 1
Reliable Tech Inc. has the following total assets over two years:
2018 total assets: $1,500,000
2019 total assets: $1,800,000
Average total assets = (Beginning total assets + Ending total assets) / 2
= ($1,500,000 + $1,800,000) / 2
= $3,300,000 / 2
= $1,650,000
Therefore, the average total assets for 2019 is $1,650,000
Example 2
Amann Co.’s balance sheet reports:
Dec 31, 2017 total assets = $3,250,000
Dec 31, 2018 total assets = $3,000,000
Average total assets = ($3,250,000 + $3,000,000) / 2
= $6,250,000 / 2
= $3,125,000
Amann Co.’s average total assets for 2018 is $3,125,000.
Example 3
Rapheal Inc. has:
Beginning total assets (2017) = $5 million
Ending total assets (2018) = $4.5 million
Average total assets = ($5,000,000 + $4,500,000) / 2
= $9,500,000 / 2
= $4,750,000
Rapheal’s average total assets for 2018 is $4.75 million.
Applications of Average Total Assets
The average total assets figure is predominantly used for computing asset turnover and return on assets:
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Asset Turnover – Measures efficiency of assets use to generate sales.
Asset Turnover = Net Sales / Average Total Assets -
Return on Assets (ROA) – Evaluates profitability relative to asset base.
ROA = Net Income / Average Total Assets
A higher asset turnover and ROA indicates assets are being used more productively. Comparing these ratios over time highlights improving or worsening trends in asset utilization.
Limitations of Average Total Assets
While an important metric, average total assets does have some drawbacks:
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Can be impacted by asset revaluations and impairments. These one-time adjustments affect the asset carrying amounts.
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Does not factor in asset quality. Highly illiquid or obsolete assets reduce realizable value.
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Asset balances fluctuate during a year. Averages smooth out these changes.
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Does not reflect true “operating” assets. Includes cash, investments and intangibles which may not produce revenue.
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Distorts analysis if asset composition changes dramatically between periods.
Despite these limitations, average total assets remains a handy proxy for sizing the asset base deployed and is easy to calculate. It is a ubiquitous metric used across financial statement analysis frameworks.
We have covered the meaning, importance, calculation steps, examples and applications of average total assets in detail. The key takeaways are:
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Average total assets help measure investment in assets and their productivity over time.
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It is calculated by averaging the beginning and ending total asset balances for a period.
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The result is used to compute asset turnover ratio and return on assets.
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Compare average total assets over years to spot positive or negative trends.
Now you are equipped to easily calculate this useful metric for any company using their balance sheet data!
What are average assets?
A companys balance sheet will often report the average level or value of assets held over an accounting period, such as a quarter or fiscal year. It is often calculated as beginning assets less ending assets divided by two. This is done because on any given day, a firms actual level of assets will fluctuate in the course of doing business. The average, therefore, provides a better metric.
Understanding Return on Average Assets (ROAA)
Return on average assets (ROAA) shows how efficiently a company is utilizing its assets and is also useful when assessing peer companies in the same industry. Unlike return on equity, which measures the return on invested and retained dollars, ROAA measures the return on the assets purchased using those dollars.
The ROAA result varies greatly depending on the type of industry, and companies that invest a large amount of money up front into equipment and other assets will have a lower ROAA. A ratio result of 5% or better is generally considered good.
The ratio shows how well a firms assets are being used to generate profits. ROAA is calculated by taking net income and dividing it by average total assets. The final ratio is expressed as a percentage of total average assets. The formula is:
R O A A = Net Income Average Total Assets where: Net Income = Net income for the same period as assets Average Assets = ( Beginning + Ending Assets ) / 2 begin{aligned} &ROAA=frac{text{Net Income}}{text{Average Total Assets}}\ &textbf{where:}\ &text{Net Income} = text{Net income for the same period as assets}\ &text{Average Assets} = (text{Beginning} + text{Ending Assets}) / 2 end{aligned} ROAA=Average Total AssetsNet Incomewhere:Net Income=Net income for the same period as assetsAverage Assets=(Beginning+Ending Assets)/2
Net income is found on the income statement, which provides an overview of a companys performance during a given time period. Analysts can look to the balance sheet to find assets. Unlike the income statement, which shows growing balances through the year, the balance sheet is only a snapshot in time. It does not provide an overview of changes made over a certain time period, but at the end of the time period.
To arrive at a more accurate measure of return on assets, analysts like to take the average of the asset balances from the beginning and end of the same period that was used to define net income.
Analysts often use average assets because it takes into consideration balance fluctuations throughout the year and provides a more accurate measure of asset efficiency over a given time period.
Asset Turnover Example
What is average total assets?
Average total assets are the average carrying value of assets that are recorded on the balance sheet at the different balance sheet dates. Usually, the carrying value of assets at the end of the previous year and those at the end of the current year are used in the calculation to find average total assets on the balance sheet.
How to calculate total assets?
Step 01: The first step is to determine the accounting period, a month or year. Then, take the total assets figure at the end of that accounting period. This figure can be obtained from the balance sheet at the end of the year. Step 02: The second step is to take the total assets figure for the preceding accounting period.
How do you calculate average assets?
Using the previous examples of $750,000 and $705,000, perform the addition operation in the formula: Average total assets = ($750,000) + ($705,000) / 2 Average total assets = ($1,455,000) / 2 4. Divide the sum by two After adding your current and previous total asset values, divide the sum by two to complete the formula.
How do you calculate the total assets of meta?
Now, we only have to use the simple formula given below: Average Total Assets = (Total assets for the current year) + (Total assets for the current year) / 2 Average Total Assets = ($185,727 + $ 165,987) / 2 = $ 351,714 / 2 Average Total Assets = $175,857 B The average total assets of Meta at the end of 2022 are $175,857 billion.
