How to evaluate how correctly and effectively a company uses its capabilities? How can you value a company in order to sell it or attract investors? For a competent analysis, relative and absolute indicators are used, which allow one to draw conclusions not only about the monetary value, but also about the prospects for purchasing/investing in the project. One of these indicators is return on assets, the calculation formula for which will be given below. In our article you will learn about what this term means, when it is used and what it shows.
Introduction
For a competent assessment economic activity it is necessary to combine relative and absolute indicators. The first talk about how profitable and liquid the enterprise is, whether it has prospects and chances to remain on the market during crises. It is by relative indicators that two companies operating in the same fields are compared.
Return on assets shows the efficiency of your property
Absolute indicators are numerical/monetary values. This includes profit, revenue, product sales volumes and other values. A correct assessment of an enterprise is only possible by comparing two indicators.
What is RA
The term “return on assets” sounds like English language as return on assets and has the abbreviation ROA. Knowing it, you can understand how effectively the company uses its existing assets. This is a very important indicator that allows you to conduct a global analysis of your company’s economic activities. That is, to put it simply, return on assets is the efficiency of your property.
On this moment Three types of ROA are used:
- Classic return on assets (ROA).
- Profitability of existing current assets.
- Profitability of existing non-current assets.
Let's look at these concepts. Current assets describe the company's existing assets, which are indicated in the balance sheet (section number 1), as well as in lines 1210, 1230 and 1250. This property must be used for production cycle or one calendar year. These assets influence the cost of a company's final service or manufactured product. This usually includes:
- Existing accounts receivable.
- Value added tax.
- “Frozen” in warehouses and production working capital.
- Currency and other equivalents.
- Various short-term loans.
The higher the return on assets, the more profit the company makes
Experts divide OO into three types:
- Cash (loans, short-term investments, VAT, etc.).
- Material: raw materials, workpieces, supplies.
- Intangible: receivables and equivalents.
Second, no less important concept, these are non-current assets of the enterprise. This term includes all property that is used more than a year and is displayed in 1150 and 1170 lines. These assets do not lose their properties over a long period of time (but are subject to depreciation), therefore they add only a small part to the cost of the final service or product. This term includes:
- key property of the company (office and industrial buildings, transport, equipment, machines);
- classic intangible assets (reputation, brand, licenses, existing patents, etc.);
- existing long-term loans and liabilities.
Read also: What is fixed capital
These assets are also divided into three types, like current ones.
How to calculate
In order to find out the return on assets ratio, you can use the formula (PR/ASR)*100%. The formula may also look like this: (PE/Asp)*100%. By taking profit data and calculating the corresponding values, you will find out how much money each ruble invested in the company’s property brings in and whether the assets can generate profit at all.
A high return on assets ratio is usually observed in trading and innovative enterprises
To find how much profit your assets are generating, you can use the TR-TC formula. Here TR stands for cost revenue and TC stands for cost of the product/service. To find TR, use the formula P*Q, where Q is sales volume and P is the cost of one product.
To find the cost, you need to find data on all the costs of the enterprise for a production cycle or a certain time and add them up. Costs include rent, utilities, salary for workers and management, depreciation, logistics, security, etc. Knowing the cost, you can calculate the net profit: TR-TC-PrR+PrD-N. Here N stands for taxes, PrR stands for other expenses, PrD stands for other income. PrD and PrR are terms that denote income and expenses that are not directly related to the company’s activities.
We count according to the balance
There is a special formula for return on assets on the balance sheet - it is usually used if the data is completely open . The balance sheet indicates the number and value of assets at the beginning and end of the year. You can find out profitability quite simply - calculate the arithmetic average for each section of the balance sheet from lines 190 and 290. This way you will find out the cost of non-current and current assets. IN small companies the calculation is done on lines 1150 and 1170, as a result you will find out the average annual cost of VnA.
Then we use the formula ObAsp = ObAnp + ObAkp. Here everything is the same as in the previous formula, and ObA denotes the value of current assets. Now we add the two resulting numbers and get the average annual value of the company’s property. This is done using the formula Asp = ObAsr + InnAsr.
Return on assets is a relative indicator that can be used to compare businesses
Based on this, we can conclude: return on assets shows the return on your company’s assets. The higher this ratio, the higher the profit and the lower the costs. That is why you need to strive to make your property more profitable, and not a hanging dead weight and devouring your existing reserves.
Let's consider the profitability ratios of the enterprise. In this article we will look at one of the key indicators for assessing the financial condition of an enterprise – return on assets.
The return on assets ratio belongs to the group of “Profitability” ratios. The group shows the effectiveness of cash management at the enterprise. We will look at the return on assets (ROA) ratio, which shows how much cash flows per unit of assets a business has. What are enterprise assets? More in simple words– this is his property and his money.
Let's look at the formula for calculating the return on assets (ROA) ratio with examples and its standard for enterprises. It is advisable to begin studying the coefficient with its economic essence.
Return on assets. Indicators and direction of use
Who uses the return on assets ratio?
It is used by financial analysts to diagnose the performance of an enterprise.
How to use return on assets ratio?
This ratio shows the financial return from the use of the company's assets. The purpose of its use is to increase its value (but taking into account, of course, the liquidity of the enterprise), that is, with its help, a financial analyst can quickly analyze the composition of the enterprise’s assets and evaluate their contribution to the generation of total income. If any asset does not contribute to the income of the enterprise, then it is advisable to abandon it (sell it, remove it from the balance sheet).
In other words, return on assets is an excellent indicator of the overall profitability and efficiency of an enterprise.
. Calculation formula
Return on assets is calculated by dividing net income by assets. Calculation formula:
Return on assets ratio = Net profit / Assets = line 2400/line 1600
Often, for a more accurate assessment of the ratio, the value of assets is taken not for a specific period, but the arithmetic average of the beginning and end of the reporting period. For example, the value of assets at the beginning of the year and at the end of the year divided by 2.
Where to get the value of assets? It is taken from the financial statements in the “Balance Sheet” form (line 1600).
In Western literature, the formula for calculating return on assets (ROA, Return of assets) is as follows:
Where:
NI – Net Income (net profit);
TA – Total Assets.
An alternative way to calculate the indicator is as follows:
Where:
EBI is the net profit received by shareholders.
Video lesson: “Assessing the return on assets of a company”
Return on assets ratio. Calculation example
Let's move on to practice. Let's calculate the return on assets for the aviation company JSC Sukhoi Design Bureau (produces aircraft). To do this, you need to take financial reporting data from the company’s official website.
Calculation of return on assets for JSC OKB Sukhoi
Profit and loss statement of JSC OKB Sukhoi
Balance sheet JSC "OKB Sukhoi"
Return on assets ratio 2009 = 611682/55494122 = 0.01 (1%)
Return on assets ratio 2010 = 989304/77772090 = 0.012 (1.2%)
Return on assets ratio 2011 = 5243144/85785222 = 0.06 (6%)
According to the foreign rating agency Standard & Poor’s, the average return on assets in Russia in 2010 was 2%. So Sukhoi’s 1.2% for 2010 is not so bad compared to the average profitability of the entire Russian industry.
The return on assets of JSC Sukhoi Design Bureau increased from 1% in 2009 to 6% in 2011. This suggests that the efficiency of the enterprise as a whole has increased. This was due to the fact that net profit in 2011 was significantly higher than in previous years.
Return on assets ratio. Standard
The standard for the return on assets ratio, as for all profitability ratios Kra >0. If the value is less than zero, this is a reason to seriously think about the efficiency of the enterprise. This will be caused by the fact that the enterprise operates at a loss.
Summary
We analyzed the return on assets ratio. I hope you don't have any more questions. To summarize, I would like to note that ROA is one of the three most important profitability ratios for an enterprise, along with the return on sales ratio and the return on equity ratio. You can read more about the return on sales ratio in the article: ““. This ratio reflects the profitability and profitability of the enterprise. It is typically used by investors to evaluate alternative projects for investment.
Unit of measurement:
% (percent)
Explanation of the indicator
Return on Assets (ROA) - shows the efficiency of using the company's assets to generate profit. A high value of the indicator indicates the good performance of the enterprise. The value can be interpreted as follows: X kopecks of net profit were received for each ruble of assets used Calculated as the ratio of the net profit (or net loss) received to the average annual amount of assets. Information about the value of assets can be obtained from the balance sheet, and information about the amount of net profit can be obtained from the income statement (income statement).
Standard value:
There is no single standard value for the indicator. It is necessary to analyze it in dynamics, that is, by comparing the value various years during the study period. In addition, it is worth comparing the value of the indicator with the values of direct competitors (who have the same size in terms of assets or income).
The higher the indicator, the more effective the entire management process is, since the return on assets indicator is formed under the influence of all the company’s activities.
Indicator value in Russia:
In Russia, the dynamics of the indicator were as follows:
Rice. 1 Change in return on assets during 1995-2015, %
It is obvious that the profitability of domestic enterprises has remained extremely low since 2008. The reasons for this are a decrease in prices for some export products, a decrease in sales volumes of export products, a weakening of the domestic market, etc.
Notes and adjustments
1. The value of assets can fluctuate significantly throughout the year, so if such information is available, it is necessary to consider the values at the end of the quarter, month or week.
2. Some authors claim that negative value There is no such thing as profitability, therefore, in the case of a net loss, it is necessary to set zero and separately calculate the loss indicators. This approach is not correct, since there is a concept of negative profitability.
Directions for solving the problem of finding an indicator outside the standard limits
Optimizing the structure of assets will reduce their volume and increase profitability, provided that the volume of generated profit increases or remains at the previous level.
Considering that return on assets is formed under the influence of absolutely all internal and external factors, reserves for increasing the indicator can be found in all areas of the company’s work. In general, it is necessary to work towards reducing the amount of expenses and increasing income.
Calculation formula:
Return on assets = Net profit (Net loss) / Average annual assets * 100% (1)
Average annual amount of assets = Total assets at the beginning of the year/2 + Total assets at the end of the year/2 (2)
Average annual assets = Sum of asset values at the end of each quarter / 4 (3)
Average annual amount of assets = Sum of asset values at the end of each month / 12 (4)
Average annual assets = Sum of asset values at the end of each week / 51 (5)
Average annual assets = Sum of asset values at the end of each day / 360 (6)
The amount of assets fluctuates throughout the year, so formula 3 will give a more accurate result than formula 2. Formula 4 will be more accurate than formula 3, etc. The choice of formula depends on the information that is available to the analyst.
Calculation example:
Company OJSC "Web-Innovation-plus"
Unit of measurement: thousand rubles.
Each enterprise is interested in stable, full-fledged work, obtaining high results, developing the material and technical base and the level of qualifications of personnel. All this requires investment and careful attention to every penny. Reinforce forward planning Mathematical formulas for calculating economic benefits will help, which provide a parallel assessment of the professionalism of management personnel.
How financial assessment asset ratio or ROA (English abbreviation ReturnOnAssets) shows the effectiveness of management in obtaining maximum returns from the use of all sources of economic benefit of the enterprise. The capital structure (debt to equity ratio) and its impact on net income is not taken into account.
What numbers are taken into account?
- Net profit is the balance of funds after paying taxes, mandatory fees, and budget allocations. This amount can be reserved, allocated to working capital or invested in production development.
- calculated as a relative value of the value of the property.
Important: taxes in monetary form are usually displayed as a percentage.
The “Profit and Loss Statement” contains information about the tax burden of the organization.
- Interest payments are a regular expense incurred by a business using borrowed funds.
Payments = (credit amount * interest rate on the loan (1 + interest rate on the loan) number of payments): ((1+ interest rate on the loan) number of payments – 1)
To calculate the interest rate, you need to know the number of payments per year according to contractual obligations (monthly, quarterly, etc.).
For example, at 16% per annum the interest rate is calculated as follows:
16 / (12 * 100) = 0.13333
Calculation of return on assets ratio
The detailed one looks like this:
ROA = ((Net profit + interest payments) * (1-tax rate) / (enterprise assets)) * 100%
The assets of the enterprise in the denominator are all cash, including accounts receivable and deposits (liquid sources), as well as raw materials, materials, buildings and structures (less liquid), etc.
The growth of economic results per unit of invested funds depends directly on the tax component and borrowed resources.
Normal profitability value
The higher the capital investments and capital-forming investments of the enterprise, the lower the ROA ratio, which reflects cash flow.
Eg, building sector, energy, transport constantly require the introduction of new capacities, updating the material and technical base, as mandatory condition their survival with limited sources of funding. ROA is inversely proportional to high costs and its value decreases.
Firms, large companies covering the service sector market do not need basic reconstruction, technical re-equipment of the enterprise and protection environment from the results of its activities. Their profitability far exceeds the manufacturing sector.
The activity of an enterprise is unprofitable if this parameter is less than zero. A thorough analysis of the indicators is required.
Return on assets ratio: calculation example
GRAN LLC produces household chemicals. It is necessary to calculate profitability for 2013, 2014 and 2015.
From the “Profit and Loss Statement” we take the values of net profit/loss for each year.
2013 - 934,766 rub.
2014 - 345,870 rub.
2015 - 222,786 rub.
From “ ”, which includes current and non-current asset positions, you will need the following line:
2013 - 10,234,766 rub.
2014 - RUB 15,345,870
2015 - 18,222,786 rub.
Calculation by year
- 2013 - (934766 / 10234766) * 100 = 9.13%
- 2014 - (345870 / 15345870) * 100 = 2.25%
- 2015 - (222786 / 18222786) * 100 = 1.22%
Conclusion: active savings are growing, but profits are steadily decreasing. This enterprise needs to revise its financial policy, improve the quality of management and distribution of cash flows, and search for markets for its products.
Mathematical formulas and conditional numerical components help you quickly understand financial condition subject of economic activity. They are valuable for managers, company owners, and people interested in the real state of affairs.
Profitability- a relative indicator of economic efficiency. The profitability of an enterprise comprehensively reflects the degree of efficiency in the use of material, labor, monetary and other resources. The profitability ratio is calculated as the ratio of profit to the assets or flows that form it.
IN in a general sense Product profitability implies that the production and sale of a given product brings profit to the enterprise. Unprofitable production is production that does not make a profit. Negative profitability is an unprofitable activity. The level of profitability is determined using relative indicators - coefficients. Profitability indicators can be divided into two groups (two types): and return on assets.
Return on sales
Return on sales is a profitability ratio that shows the share of profit in each ruble earned. Usually calculated as the ratio of net profit (profit after tax) for a certain period to expressed in cash sales volume for the same period. Profitability formula:
Return on Sales = Net Profit / Revenue
Sales return is an indicator pricing policy the company and its ability to control costs. Differences in competitive strategies and product lines cause significant variation in return on sales in various companies. Often used to evaluate the operating efficiency of companies.
In addition to the above calculation (return on sales by gross profit; English: Gross Margin, Sales margin, Operating Margin), there are other variations in calculating the return on sales indicator, but to calculate all of them, only data on the profits (losses) of the organization are used (i.e. e. data from Form No. 2 “Profit and Loss Statement”, without affecting the Balance Sheet data). For example:
- return on sales (the amount of profit from sales before interest and taxes in each ruble of revenue).
- return on sales based on net profit (net profit per ruble of sales revenue (English: Profit Margin, Net Profit Margin).
- profit from sales per ruble invested in the production and sale of products (works, services).
Return on assets
Unlike return on sales indicators, return on assets is calculated as the ratio of profit to average cost enterprise assets. Those. the indicator from Form No. 2 “Income Statement” is divided by the average value of the indicator from Form No. 1 “Balance Sheet”. Return on assets, like return on equity, can be considered as one of the indicators of return on investment.
Return on assets (ROA) is a relative indicator of operational efficiency, the quotient of dividing the net profit received for the period by the total assets of the organization for the period. One of the financial ratios is included in the group of profitability ratios. Shows the ability of a company's assets to generate profit.
Return on assets is an indicator of the profitability and efficiency of a company's operations, free of the influence of the volume of borrowed funds. It is used to compare enterprises in the same industry and is calculated using the formula:
Where:
Ra—return on assets;
P—profit for the period;
A is the average value of assets for the period.
In addition, the following performance indicators have become widespread: individual species assets (capital):
Return on equity (ROE) is a relative indicator of operating efficiency, the quotient of dividing the net profit received for the period by equity organizations. Shows the return on shareholder investment in a given enterprise.
The required level of profitability is achieved through organizational, technical and economic measures. Increasing profitability means getting greater financial results with lower costs. The profitability threshold is the point separating profitable production from unprofitable, the point at which the enterprise’s income covers its variable and semi-fixed costs.