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.
Performance indicators can be divided into direct and inverse. Direct performance indicators are return ratios that show what conditional unit of result is obtained from a conditional unit of costs to obtain it. Inverse efficiency measures are capacity factors that illustrate how many conventional cost units are needed to obtain a conventional unit of result.
One of the main indicators of the efficiency of the economic activity of the enterprise is profitability. Profitability indicators are less subject to the influence of inflation and are expressed by different ratios of profit and costs. Profitability indicators are mainly measured in the form of ratios.
Profitability
Profitability can be defined as an indicator of economic efficiency, reflecting the degree of efficiency in the use of material, monetary, production, labor and other resources.
Profitability indicators are divided into different groups and calculated as the ratio of the selected meters.
The main types of profitability are the following indicators:
- Return on assets.
- Profitability of fixed production assets.
- Profitability of sales.
Return on assets
Return on assets is a financial ratio showing the profitability and efficiency of the enterprise. Return on assets shows how much profit the organization received from each ruble spent. Return on assets is calculated as net income divided by average assets multiplied by 100%.
Return on assets \u003d (Net profit / Average annual value of assets) x 100%
The values for calculating the return on assets can be taken from the financial statements. Net profit is shown in form No. 2 “Profit and Loss Statement” (new name “Statement of Financial Results”), and the average value of assets can be obtained from form No. 1 “Balance Sheet”. For accurate calculations, the arithmetic mean of assets is calculated as the sum of assets at the beginning of the year and the end of the year, divided by two.
Using the return on assets indicator, you can identify what are the discrepancies between the predicted level of profitability and the actual indicator, as well as understand what factors influenced the deviations.
Return on assets can be used to compare the performance of companies in the same industry.
For example, the value of the company's assets in 2011 amounted to 2,698,000 rubles, in 2012 - 3,986,000 rubles. Net profit for 2012 is 1,983,000 rubles.
The average annual value of assets is 3,342,000 rubles (arithmetic mean between the indicators of the value of assets for 2011 and 2012)
Return on assets in 2012 amounted to 49.7%.
Analyzing the obtained indicator, we can conclude that for each ruble spent, the organization received a profit of 49.7%. Thus, the profitability of the enterprise is 49.7%.
Profitability of fixed production assets
Profitability of fixed production assets or profitability of fixed assets is the quotient of dividing net profit to the cost of fixed assets, multiplied by 100%.
OPF profitability = (Net profit / Average annual cost of fixed assets) x 100%
The indicator shows the real profitability from the use of fixed assets in the production process. Indicators for calculating the profitability of fixed assets are taken from the financial statements. Net profit is indicated in the form No. 2 “Profit and Loss Statement” (new name “Statement of Financial Results”), and the average value of the value of fixed assets can be obtained from form No. 1 “Balance Sheet”.
For example, the value of fixed production assets of the enterprise in 2011 amounted to 1,056,000 rubles, in 2012 - 1,632,000 rubles. Net profit for 2012 is 1,983,000 rubles.
The average annual cost of fixed assets is 1,344,000 rubles (arithmetic average of the cost of fixed assets for 2011 and 2012)
The profitability of fixed production assets is 147.5%.
Thus, the real return on the use of fixed assets in 2012 amounted to 147.5%.
Profitability of sales
Return on sales shows how much of an organization's revenue is profit. In other words, the profitability of sales is a coefficient that illustrates what share of the profit is contained in each earned ruble. Return on sales is calculated for a given period of time and is expressed as a percentage. With the help of profitability of sales, an enterprise can optimize, as well as the costs associated with commercial activities.
Return on Sales = (Profit / Revenue) x 100%
The values of profitability of sales are specific to each organization, which can be explained by the difference in the competitive strategies of companies and their range.
To calculate the profitability of sales, various types of profit can be used, which leads to the existence of different variations of this coefficient. The most commonly used return on sales calculated from gross profit, operating return on sales, return on sales calculated from net profit.
Return on sales by gross profit = (Gross profit / Revenue) x 100%
Gross profit margin on sales is calculated as the quotient obtained by dividing gross profit by revenue multiplied by 100%.
Gross profit is determined by subtracting cost of sales from revenue. These indicators are contained in Form No. 2 “Profit and Loss Statement” (new name “Statement of Financial Results”).
For example, the gross profit of the enterprise in 2012 amounted to 2,112,000 rubles. Revenue in 2012 is 4,019,000 rubles.
The return on sales in terms of gross profit is 52.6%.
Thus, we can conclude that each earned ruble contains 52.6% of gross profit.
Operating return on sales = (Profit before tax / Revenue) x 100%
Operating return on sales is the ratio of profit before tax to revenue, expressed as a percentage.
Indicators for calculating operating profitability are also taken from Form No. 2 "Profit and Loss Statement".
The operating profitability of sales shows how much of the profit is contained in each ruble of revenue received, minus interest and taxes paid.
For example, profit before tax in 2012 is 2,001,000 rubles. Revenue in the same period amounted to 4,019,000 rubles.
Operating return on sales is 49.8%.
This means that after deducting taxes and interest paid, each ruble of proceeds contains 49.8% of the profit.
Return on sales based on net profit = (Net profit / Revenue) x 100%
Return on sales based on net profit is calculated as net profit divided by revenue multiplied by 100%.
The indicators for calculating the profitability of sales based on net profit are contained in Form No. 2 “Profit and Loss Statement” (new name “Statement of Financial Results”).
For example, Net profit in 2012 is 1,983,000 rubles. Revenue in the same period amounted to 4,019,000 rubles.
Return on sales in terms of net profit is 49.3%. This means that in the end, after paying all taxes and interest, 49.3% of the profit remained in each ruble earned.
Profitability analysis
The profitability of sales is sometimes called the rate of return, because the profitability of sales shows the share of profit in the proceeds from the sale of goods, works, services.
To analyze the coefficient characterizing the profitability of sales, you need to understand that if the profitability of sales decreases, then this indicates a decrease in the competitiveness of products and a drop in demand for it. In this case, the company should think about holding events that stimulate demand, improve the quality of the product offered, or conquer a new market niche.
As part of the factor analysis of the profitability of sales, the impact of profitability on the change in the price of goods, works, services and the change in their cost is considered.
To identify trends in changes in the profitability of sales in dynamics, it is necessary to single out the base and reporting periods. As the base period, you can use the indicators of the previous year or the period in which the company received the highest profit. The base period is needed to compare the resulting sales profitability ratio for the reporting period with the ratio taken as a basis.
Profitability of sales can be increased by increasing the prices for the offered assortment or by reducing the cost price. To make the right decision, an organization must focus on such factors as: market dynamics, fluctuations in consumer demand, the possibility of saving internal resources, evaluation of competitors, and others. For these purposes, the instruments of commodity, price, marketing and communication policy are used.
The following main areas for increasing profits can be distinguished:
- Increasing production capacity.
- Product quality management.
- Development of marketing policy.
- Cost reduction.
- Staff motivation.
Using the achievements of scientific progress requires capital investments, but allows you to reduce the costs of the production process. Existing equipment can be upgraded to save resources and improve operational efficiency.
Quality products are always in demand, therefore, if the profitability of sales is insufficient, the company should take measures to improve the quality of the products offered.
Marketing strategies focus on product promotion based on market research and consumer preferences. In large companies, entire marketing departments are created. Some enterprises have a separate specialist who is engaged in the development and implementation of marketing activities. In small organizations, the duties of a marketer are assigned to managers and other specialists of management departments. requires significant costs, but its successful implementation leads to excellent financial results.
The cost of the proposed product range can be reduced by finding suppliers who offer products and services cheaper than others. Also, saving on the price of materials, you need to ensure that the quality of the final product offered for sale remains at the proper level.
Personnel management is a separate sector of management activity. The production of quality products, the reduction of defective products, the sale of the final product, to a certain extent, depends on the responsibility of workers. In order for employees to perform their work duties efficiently and promptly, there are various motivational and stimulating strategies. For example, rewarding the best employees, holding corporate events, organizing branded press, etc.
Summarizing the above, readers of MirSovetov can conclude that profit and profitability indicators are the main criteria for determining the effectiveness of the financial and economic activities of an enterprise. In order to improve the financial result, it is necessary to evaluate it, and on the basis of the information received, analyze which factors hinder the development of the organization as a whole. After the existing problems are identified, you can proceed to the formulation of the main directions and activities in order to increase the company's profits.
Analysis of the finances and performance of the enterprise without fail includes the calculation of profitability. This calculation is used not only to assess the activities of the enterprise, the efficiency of the use of its resources, but also to assess the risk of falling under tax control. In this article, we will consider the concept and formula of the return on net assets.
Return on assets based on net profit
Typically, a company with a sufficient return on assets is characterized as efficient, so it can count on the favor of investors and creditors.
Why is this happening? The fact is that the commercial extraction of income as the main activity is always associated with costs. In other words, in order to achieve profit, one should invest and use the resource base of the enterprise wisely. Errors in this area will inevitably entail consequences that will affect the final results of the company, up to and including losses for a specific billing period.
In order to evaluate financial investments and their results, the net asset profitability ratio is used. The value of this indicator allows you to identify the relationship between resources, costs and financial results of the enterprise.
This indicator is calculated as a percentage, and is derived by dividing the net profit indicator by the value of the net assets of the enterprise.
Net assets are assets that are financed by the organization's own and borrowed funds over a long period of time.
The formula for calculating net current assets is as follows:
CHOA \u003d OA - COP, where:
- NAV is net current assets;
- OA are current assets;
- COP is the short-term liabilities of the enterprise.
The calculation of return on net assets shows the average return on all resources available to the company.
To obtain a more specific result, profitability should be calculated separately, for example:
- own capital;
- investments;
- various expenses;
- production facilities, etc.
Return on net assets - is it an indicator of the efficiency of the use of the resource base?
Yes, but not everything is so unambiguous It is important to understand that the indicator of the considered value is very closely related to the type of activity of the enterprise.
The resource base for various industries differs not only in composition, but also in the level of profitability. There are many areas of activity in which the investment of capital justifies itself over a sufficiently long period of time. These, for example, include maritime transport or the energy industry. The corresponding areas of activity are characterized by large long-term investments, which often do not give a quick effect in the economy.
Accordingly, industries that do not have the above characteristics show different profitability indicators. In particular, return on assets in terms of net profit in the services sector may show a higher percentage than in capital-intensive production.
Therefore, it is impossible to determine the effectiveness of an enterprise based only on the indicator of profitability under consideration. The analysis should include all important criteria, incl. related to the business area.
The conclusion is this: the return on net assets characterizes the company in terms of the effective use of the available resource base. However, this indicator should not be considered separately, but taking into account other economic characteristics of the enterprise.
Return on assets- what is it, how to calculate it and why does an accountant need it? You will learn about this from our article.
What does return on assets show?
Profitability is a whole system of indicators that characterize the efficiency of an enterprise. One of these indicators is the return on assets ratio. It is commonly referred to as ROA (short for English return on assets).
This coefficient demonstrates how high the return on funds invested in the organization's property is, what profit each ruble invested in its assets brings to the company.
In general, the formula for calculating the return on assets can be represented as follows:
ROA = Pr / Ak × 100%,
ROA - return on assets;
Pr - profit (for calculation, they take either net or profit from sales, depending on what profitability the user is interested in);
Ak - the assets of the organization (as a rule, the average value of assets for the period is used for calculation).
Return on assets is a relative indicator, usually expressed as a percentage.
Types of return on assets
Calculate 3 indicators of return on assets:
- profitability of non-current assets - let's denote it ROAin;
- return on current assets — ROAob;
- return on total assets - ROA.
How to calculate the profitability of non-current assets (balance sheet formula)
Non-current assets are the so-called long-term assets that the company uses for a long time - more than 12 months. Such property is reflected in Section I of the balance sheet. These are fixed assets, intangible assets, long-term financial investments, etc.
When calculating the profitability of assets of this category, the denominator should reflect the total for section I - line 1100. Then we will get the profitability of all available non-current assets.
If necessary, you can analyze the profitability of assets of a particular type, such as fixed assets or a group of non-current assets (tangible, intangible, financial). In this case, the formula is substituted with data on the lines that reflect the relevant property.
The easiest way to calculate the average value of assets is to add the figures at the beginning and end of the year and divide the sum by 2.
See balance for more information. .
Profit indicators for the numerator of the return on assets formula must be taken from the income statement, known to everyone under form 2:
- sales profit - from line 2200;
- net profit - from line 2400.
Read about form 2: .
The formula for calculating the profitability of current assets
The principle of calculating the profitability of assets of this type is the same. In the numerator of the formula we put the profit we need from the income statement, in the denominator - the average value of the value of current assets. If we consider the profitability of all assets, we take the result of section II of the asset balance (line 1200). If they are interested in a separate type - information from the corresponding line of the second section.
Why does an accountant need return on assets?
It is generally accepted that, for the most part, the return on assets indicator is of interest to financiers and analysts who evaluate business performance and look for growth reserves. However, it is also important for accountants or tax specialists of companies. The fact is that profitability, including return on assets, is one of the criteria for assessing the risk of falling into the plan of tax audits, provided for by order of the Federal Tax Service of Russia dated May 30, 2007 No. MM-3-06 / 333@. The critical deviation is the deviation of the return on assets of the organization from the industry average by 10% or more.
The effect of the enterprise's activities in absolute terms is expressed as the amount of profit or loss. However, the use of absolute values for analysis is not very convenient, therefore, they often resort to calculating relative indicators. In terms of efficiency, the most popular indicators are profitability indicators. I would like to dwell in more detail on those of them that characterize the profitability of the company's assets. The special significance of this group of indicators lies in the fact that all the activities of the enterprise are mainly associated with interaction with property, which is represented in the assets. Thus, it is extremely important to determine the degree of effectiveness of this interaction.
It occurs by the ratio of profit to the amount of what the profitability of which is determined, in this case - assets. As for profit, everything is not so clear-cut. There are a lot of different indicators that can be used in calculations. Most often, return on assets is calculated for before tax or for. Return on assets determined by the amount of net profit shows how much of this profit falls on each unit of the value of the organization's property. is influenced by many factors, so it will not always be correct to use it in calculations if it is supposed to compare the indicators of various enterprises with each other. The use of profit before taxation will allow getting rid of the influence of peculiarities in taxation, and only the efficiency of the main activity can be taken into account by calculating the profit from sales.
As mentioned above, return on assets shows the degree to which a firm is using its assets effectively. It is clear that this property is heterogeneous, and it is customary to classify it. In this regard, it will not be superfluous to determine the profitability of the company's current and non-current assets separately. The calculated coefficients will characterize the efficiency of using each of these parts separately.
It is necessary to pay attention to the fact that the principles of accounting for profit and assets are somewhat different. The profit presented in the reporting reflects the value accumulated for the period, and the assets - the value at a specific date. In order to smooth out these differences and take into account possible changes in the value of assets, it is customary to use their average value for the period in calculations.
Return on assets shows the level of efficiency in and of itself, but it is simply impossible to draw any conclusions from a single indicator. It is necessary to have a number of indicators in order to compare them with each other. Most often, they resort to the use of comparisons over time, which consist in studying the dynamics of indicators. For this, relative and absolute changes are determined, which makes it possible to judge the presence of any trend. In addition, comparisons are often made with the levels of profitability of other similar enterprises or with the profitability characteristic of the industry as a whole. Another popular method of analysis is factorial, which is carried out according to long-established traditional methods and allows you to assess the impact of certain factors.
As you can see, determining the effectiveness of the use of property is a very important aspect of studying the activities of the enterprise. The return on assets shows, depending on the indicators used, both the profitability of the main activity and the functioning of the enterprise in general. However, it should be remembered that a simple calculation is not enough, and it is necessary to analyze the results obtained.
