Every entrepreneur wants to know how productively the money invested by him is working. Return on assets shows the effectiveness of investments.
Profitability serves to control and analyze the financial activities of the company. This is an indicator of efficiency, expressed in terms of money or percentage. The profitability ratio is calculated separately for different cases, for example, when choosing a project and wanting to invest in a business, the return on investment is used (in international practice, the term ROI or ROR is used), it is obtained by dividing the profit by the investment amount. Or the profitability ratio can be used to calculate operating income, calculated by dividing sales profit by costs and multiplying by 100% and so on. There is no general calculation formula, since the profitability for each case is determined in its own way, various accounting indicators are used in the calculation.
Let's take a closer look at what is return on assets. Information about the assets of the company is contained in the balance sheet and represents the amount of property that the company has. When there is a need to calculate the value of property that will remain with the owners after they pay off their obligations, then the net assets or equity of the company are calculated. When calculating this indicator, we take assets on the balance sheet (this does not take into account the debt of the founders on contributions to the authorized capital and own shares that are redeemed from the founders) and subtract liabilities on the balance sheet (excluding deferred income).
Return on net assets
Return on assets characterizes the financial condition of the company. If the profitability is high, then the company is doing well, the company is a worthy competitor.
To understand whether we are using the invested capital correctly, how efficiently the funds are working, we use the return on net assets (RONA) indicator. All owners want the value of net assets to be higher, as this indicates the correct choice of the investment object. Here the indicator "net assets" is taken, which shows all the property of the company without its obligations. RONA is derived from the ratio of net profit after tax to non-current assets and net working capital plus fixed assets.
RONA = (Profit (net) / Equity and debt capital (average)) x 100%
Another important calculation that shows the performance of a business is the return on assets (ROA). It is calculated not only to assess the state of affairs in the company, large downward deviations of this indicator (more than 10% in the industry) can serve as a reason for an audit by the tax authorities.
In order to understand what kind of profitability a company has in an industry, you need to calculate your own and compare. Information for calculating the indicator is taken from the balance sheet and the income statement.
Return on assets ratio
Balance formula:
Profit (loss) before taxation (line 2300) / per balance currency (line 1600) x 100%.
Example
LLC "Olga" publishes a newspaper. At the end of the year, the amount of its assets is 1,700,000 rubles, and profit before tax is 210,000 rubles.
The profitability of current assets of Olga LLC is 12.35% (210,000 rubles / 1,700,000 rubles x 100).
For example, in 2015 the tax authorities set an industry average of 3.9% for return on assets. First of all, we determine the maximum level of return on assets for activities in the field of publishing, taking into account the allowable deviation.
The marginal value of return on assets will be 3.51% (3.9 - (3.9 x 10%)). We compare with the value that we got - 12.35% > 3.51%, which means that the assets of Olga LLC are more than the average value for the industry, taking into account the deviation that is allowed, and there is no reason for an audit by the tax authorities.
Return on total assets
Return on total assets or return on total assets (ROTA, Return on Total Assets) is an indicator that reveals the efficiency of using the company's long-term assets in order to make a profit. This indicator is able to reflect the return on total assets, their economic benefits and shows how competent management is in managing the business and using assets.
This indicator can be calculated as a result of the ratio of the company's operating income (EBIT) to the value of assets on average, excluding taxes and interest on loans. ROTA is operating income divided by total assets.
What are total assets? This is the property of the company (including: any equipment, vehicles, buildings, stocks, contributions, deposits, securities, intangible assets and other property), as well as cash on accounts and on hand.
Unlike ROA, ROTA is based on operating income, not net income. According to this indicator, you can see the assets of the enterprise before payment of obligations. ROTA shows how good a company is in operational terms.
For calculations, the average annual value of the firm's assets is used. To begin with, we consider the company's revenue, from which we subtract the cost of manufactured products and expenses - we get a profit from our sales. To this profit, we add operating and other income and subtract the cost of loans, as well as other non-operating expenses. After these manipulations, profit before taxes is obtained.
After that, we divide the profit by the balance sheet currency by assets and multiply by 100. As a result, the ROTA coefficient will appear.
This indicator is calculated for the purpose of additional assessment of the company's performance, if the company offers a wide range of products, for example. With this approach, it is possible to assess whether certain products bring the desired income. It can push managers to change production policies to reduce costs, increase sales revenue, and reduce debt.
Of course, this method also has a number of disadvantages, for example, when borrowed funds are attracted, the indicator becomes worse or this indicator does not take into account seasonality. When the indicator is very high, this does not mean that there are funds to pay, for example, dividends to shareholders. Profits may simply be drawn, since ROTA does not indicate whether a company is liquid.
This indicator does not reflect the completeness of the financial picture of the enterprise and should not be used as the main method for evaluating performance.
The most important indicator here is the return on assets (in other words, the return on property). This indicator can be determined by the following formula:
Return on assets- this is the profit remaining at the disposal of the enterprise, divided by the average value of assets; The result is multiplied by 100%.
Return on assets = (net profit / average annual value of assets) * 100%
This indicator characterizes the profit received by the enterprise from each ruble advanced for the formation of assets. The return on assets expresses the measure of profitability of the enterprise in a given period. Let us illustrate the procedure for studying the rate of return on assets according to the analyzed organization.
So, the increase in the level of return on assets in comparison with the plan took place solely due to an increase in the amount of the net profit of the enterprise. At the same time, the growth in the average cost of fixed assets, other non-current assets, and current assets reduced the level return on assets.
For analytical purposes, in addition to indicators of profitability of the entire set of assets, indicators of profitability of fixed assets (funds) and profitability of working capital (assets) are also determined.
Profitability of fixed production assets
The indicator of profitability of fixed production assets (otherwise called the indicator of capital profitability) is represented as the following formula:
Profit remaining at the disposal of the enterprise multiplied by 100% and divided by the average cost of fixed assets.
Return on current assets
The profit remaining at the disposal of the enterprise multiplied by 100% and divided by the average value of current assets.
ROI
The indicator of return on invested capital (return on investment) expresses the effectiveness of the use of funds invested in the development of this organization. Return on investment is expressed by the following formula:
Profit (before income tax) 100% divided by the currency (total) of the balance sheet minus the amount of short-term liabilities (total of the fifth section of the balance sheet liabilities).
Return on equity
An important role in financial analysis is played by the return on equity. It characterizes the presence of profit based on the capital invested by the owners of this organization (shareholders). Return on equity is expressed by the following formula:
The profit remaining at the disposal of the enterprise multiplied by 100% divided by the amount of equity capital (the result of the third section of the balance sheet).
If we compare the return on assets and return on equity, then this comparison will show the extent to which the organization uses financial leverage (loans and credits) in order to increase the level of profitability.
The return on equity increases if the share of borrowed sources in the total amount of sources of asset formation increases.
The difference between the return on equity and the return on total capital is called effect of financial leverage. Therefore, the effect of financial leverage is an increase in the return on equity resulting from the use of credit.
In order to get an increase in profits through the use of a loan, it is necessary that the return on assets minus interest for using the loan be greater than zero. In this situation, the economic effect obtained as a result of using the loan will exceed the costs of attracting borrowed sources of funds, that is, the interest for using the loan.
There is also such a thing as financial leverage, representing the specific weight (share) of borrowed sources of funds in the total amount of financial sources for the formation of the organization's property.
The ratio of the sources of formation of the organization's assets will be optimal if it provides the maximum increase in the return on equity in combination with an acceptable amount of financial risk.
In some cases, it is advisable for an enterprise to receive loans even in conditions where there is a sufficient amount of equity capital, since the return on equity increases due to the fact that the effect of investing additional funds can be significantly higher than the interest rate for using a loan.
The creditors of this enterprise, as well as its owners (shareholders), expect to receive certain amounts of income from the provision of funds from this enterprise. From the point of view of creditors, the indicator of profitability (price) of borrowed funds will be expressed by the following formula:
The fee for using borrowed funds (this is the profit for lenders) multiplied by 100% divided by the amount of long-term and short-term borrowed funds.
Return on assets (ROA) is a measure of how an enterprise manages existing assets in order to generate revenue. If the ROA is low, the asset management may be inefficient. A high ROA, on the contrary, indicates the smooth and efficient functioning of the company.
The formula for calculating the profitability of a company's assets
ROA is usually expressed as a percentage. The calculation is made by dividing net profit for the year by the total value of assets. If, for example, a clothing store had a net income of 1 million and its total asset value was 4 million, then the ROA would be calculated as follows:
1/4 x 100 = 25%
The ROA calculation allows you to see the return on investment and assess whether sufficient revenue is generated from the use of available assets.
ROA management
The head of the enterprise studies the ROA at the end of the year. If the ROA is high, this is a good sign that the company is making the most of its existing assets. Comparing it with other indicators, such as return on investment, it can be concluded that further investment is advisable, since the enterprise is able to use investments with high efficiency.
Learning about low ROA is vital to running a company effectively. If this indicator is consistently low, this may indicate that either management is not effectively using existing assets, or these assets no longer have value. For example, in the case of the same clothing store, it may turn out that you can increase profits by reducing the sales area, therefore, such an asset as a large area no longer has value.
Banks and potential investors pay attention to ROA and ROI indicators before making a decision on granting a loan or further investment. If similar companies generate high revenues with similar initial data, then investors may go to them or conclude that management is not effectively managing existing assets.
Increasing gross income
ROA can motivate management to use assets more efficiently. Seeing that the revenue is not as high as it should be, managers make appropriate adjustments to the activities of the enterprise. Also, ROA can show what improvements can be made to increase gross income through competent asset management. In any case, this is better than endlessly investing in a company, hoping for the best.
The economic activity of each company takes into account two main groups of indicators - relative and absolute. Absolute includes revenue, sales volume, income. Such indicators can only superficially reflect the activities of the company. For a more accurate analysis, enterprises use relative indicators, which include the calculation of profitability ratios, financial stability, and liquidity. With their help, you can find out the dynamics of the development of a structural unit, its prospects, compare with other organizations, determine,. Return on assets makes it possible to evaluate many different indicators and get an informative picture of the work of any organization.
What does return on assets show?
Return on assets (ROA) is an economic indicator that reflects the return on the use of all company resources. It shows the company's ability to regenerate income without taking into account the capital structure, the correct distribution of financial resources.
If the company's income exceeded expenses, this does not mean that its activities are successful and efficient. An income of a million can be received by a large production complex with dozens of workshops, and a small company of 5-10 employees. In the first case, it is worth thinking about restructuring the enterprise, changing the development strategy, or even about. In the second example, the result is obvious - the company is moving in the right direction. As you can see, absolute indicators do not always reflect the real picture; management efficiency can demonstrate the ratio of income received to various items of expenditure.
Profitability is divided into several groups:
- fixed assets;
- current assets.
Fixed assets
Non-current assets are the property of the company, which is indicated in the balance sheet. For large and medium-sized enterprises, this indicator is displayed in the first section of the balance sheet, for small ones - in lines 1150 and 1170.
Non-current funds are used for more than 1 year, while they do not lose their technical characteristics and are partially redirected to the cost of products or services provided.
Non-current assets of the enterprise include:
- fixed assets (tools, transport, electrical networks, production facilities, real estate);
- intangible assets (intellectual property, company partnerships);
- monetary obligations (loans for a period of 1 year or more, investments in other companies);
- other funds ().
current assets
Working capital includes property, which is indicated in the balance sheet in lines 1210, 1230 and 1250 (in the production section). These funds are used for one cycle (if it lasts less than 1 year).
The indicator includes:
- the amount of VAT on purchased goods (for this you need to know);
- accounts receivable;
- inventories;
- money and its equivalent.
Advice: to determine the totality of all assets of the company, it is necessary to sum up the current and non-current funds.
Formula for calculating profitability
Return on assets (ROA) is calculated by dividing net income by assets. Calculation formula:
ROA = NI / TA * 100%, Where
- NI - net income;
This formula shows the ratio of net income to the sum of all funds of the company. Also, ROA can be determined by another method:
ROA = EBI / TA * 100%, Where
- NI is the net profit received by the shareholders of the company;
- TA is the totality of all assets.
In other words, ROA shows the amount of income that comes from every ruble of investment invested. This is a kind of indicator of profitability, which shows the efficiency of the company.
Calculation example
According to the results of the work, the aggregate of all assets of JSC Etal at the beginning of the year amounted to 1.267 billion rubles, at the end - 1.368 billion rubles. Net profit amounted to 131.70 and 153.9 million rubles, respectively. In order to calculate the profitability at the beginning and end of the year, as well as the growth dynamics, you need:
- ROA at the beginning of the year: ROA = 131.70/1267=0.10394 or 10.394%.
- ROA at the end of the year: ROA = 153.9/1368=0.1125 or 11.25%.
The change in profitability for the year will be: ΔROA = 11.25%/10.394% = 1.082. The profitability ratio for the year increased by 1.082.
Rates of return
According to the average performance of enterprises, there are norms that reflect effective economic activity. These standards depend on the specifics of the company:
The highest ROA rates should be shown by firms that are engaged in the sale of goods. This is due to the lack of significant non-current funds. Due to expensive industrial equipment, manufacturing enterprises have more assets, so the rate of return for them is significantly lower.
Advice: high profitability indicators can indicate not only the effective operation of the company, but also speak of increased risks.
For example, a company has taken out a loan for a large amount, which will affect the ROA in the direction of its increase, but this does not yet indicate the effective distribution of the received money. Therefore, when analyzing the financial activity of an enterprise, it is necessary to take into account borrowed funds and analyze financial stability, the structure of all expenses.
Factors that determine profitability
ROA is a general indicator of the company's performance when analyzing the ratio of costs and profits. But it is also influenced by economic conditions and internal organizational factors.
External conditions are the cost of materials, raw materials for production, pricing strategies of competitors, the political situation in the country, changes in legislation, the balance of supply and demand.
Internal organizational factors include:
- labor productivity;
- technical indicators, equipment capacity;
- method of organizing the production cycle;
- management decisions, etc.
- acceleration of trade;
- increase in the cost of production;
- cost minimization.
According to Western economists, this indicator is influenced by more than 30 factors that reflect the current market situation, capital intensity, market conditions, etc. When calculating the profitability indicator, it is necessary to take into account the season, equipment downtime, marriage, crisis phenomena that reduce demand. Sometimes it's easier to sell the business and invest the proceeds in.
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Return on assets is one of the most important performance indicators of an enterprise. It is most often used by business owners and managers to determine the work strategy, investors - to evaluate alternative projects. The analysis of this indicator is an important point of any business plan, which opens up prospects for growth and development.
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What are the assets of the enterprise, we told in. And how to evaluate the effectiveness of the use of assets? We will tell in this article.
Return on Assets
The economic return on assets shows how efficiently the organization uses assets. Since the main goal of the organization is the generation of profit, it is the profit indicators that are used to assess the effectiveness of the use of assets. The return on assets characterizes the amount of profit in rubles, which brings 1 ruble of the organization's assets, i.e., the return on assets is equal to the ratio of profit to assets.
Naturally, a decrease in the return on assets indicates a decrease in the efficiency of work and should be considered as an indicator that the work of the company's management is not productive enough. Accordingly, the increase in return on assets is seen as a positive trend.
For the purposes of calculating the return on assets, net income is often used. In this case, the return on assets (K RA, ROA) will be determined by the formula:
K RA \u003d P H / A C,where ПЧ - net profit for the period;
A C is the average value of assets over the period.
For example, the average value of assets for the year is the sum of assets at the beginning and end of the year divided in half.
Multiplying the coefficient K RA by 100%, we get the return on assets as a percentage.
If instead of net profit we use the indicator of profit before tax (P DN), we can calculate the return on total assets (Р SA, ROTA):
R SA \u003d P DN / A C.And if in the above formula, instead of the total value of assets, we use the indicator of net assets (NA), you can calculate not the total return on assets, but the return on net assets (R NA, RONA):
R CHA \u003d P DN / CHA.Of course, profitability is calculated not only by assets. If attributing profit to assets, we calculate return on assets, return on sales is considered as the ratio of profit to revenue. At the same time, in addition to the profitability of assets, the effectiveness of their use is also indicated.
Return on Assets: Balance Formula
When calculating the profitability ratios of assets, accounting or financial statements data are used. So, according to the balance sheet (BB) and the income statement (OFR), the return on assets will be calculated as follows (
