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What is return on assets of an enterprise

Return on assets(Return on Assets, ROA) is a relative indicator of the efficiency of an enterprise, used in the analysis of financial statements to assess the profitability and profitability of the organization.
Return on assets is a financial ratio that characterizes the return on the use of all assets of the organization, the efficiency of use of property, allowing one to evaluate the quality of work of financial managers. That is, it shows how much net profit per monetary unit is brought by each unit of assets available to the company. In other words: how much profit is generated for each monetary unit invested in the organization’s property.
The profitability ratio is of interest to: investors, lenders, managers and suppliers. Using the ROA ratio, you can analyze an organization's ability to generate profits without taking into account its capital structure. Return on Assets is associated with such categories as the financial reliability of the enterprise, solvency, creditworthiness, investment attractiveness, competitiveness.

How is ROA ratio calculated?

Return on assets is defined as the quotient of net profit (or losses) received for the period divided by the total assets of the organization for the period.
ROA = ((net profit + interest payments) * (1 – tax rate)) / enterprise assets * 100%.
As can be seen from the formula, the entire profit of the enterprise before payment of interest on the loan is displayed. And then the amount of deducted interest, taking into account tax, is added to the amount of net profit. Payments for the use of borrowed funds are considered gross costs, and the income of investors is paid from profits after deducting all interest payments.
Such calculation features are due to the fact that when forming assets, two financial sources are used - own funds and borrowed funds. Consequently, when forming assets, it makes no difference which ruble came as part of borrowed funds and which was contributed by the owner of the enterprise. The essence of the profitability indicator is to understand how effectively each unit of raised funds was used. For this reason, it is necessary to exclude from net profit the amount of interest payments paid before income tax.

The assessment of the economic and financial activities of an enterprise is made, first of all, on the basis of profit, revenue and sales volumes. These indicators are expressed in units and are called absolute. But to adequately assess the company’s position in the industry and compare its business with its competitors, they are not enough.

For this reason, they resort to relative indicators, expressed as percentages - profitability (, assets), financial stability.
They allow you to evaluate the business picture more broadly.

What does return on assets mean?

This parameter demonstrates the efficiency with which the company uses its assets to generate revenue, and how well it manages them.

A similar indicator—return on equity—is more important when investors evaluate a company’s performance. It only takes into account the company's own assets.

While the considered indicator of return on assets includes all assets in the calculation companies and evaluates the overall quality of their management without analyzing the capital structure. It demonstrates the effectiveness of the enterprise management.

This indicator is also called rate of return.

Exists three calculation options– general indicator of profitability, current and non-current assets.

Current and non-current assets

Before moving on to considering the calculation methodology, it is necessary to clearly understand the types of assets, which are divided into current and non-current.

Current assets- these are the company’s resources that will be completely consumed in the process of creating a product, and will fully transfer their value to the final product upon completion of the production cycle. They are necessary for organizing uninterrupted business activities. Consumed once and completely.

An example of a company's current assets are such types as raw materials and semi-finished products, cash, stocks of finished products in a warehouse, financial debt of third parties to the enterprise ().

Non-current assets also called fixed assets. They are not directly involved or consumed in production, but ensure its functioning.

Buildings and structures are an inactive part. They remain unchanged for years and at most require repairs (less often, reconstruction).

Machinery and equipment, as well as engineering technologies and accessories, are an active part, directly involved in production activities, while maintaining properties and appearance. This distinguishes them from current assets that are completely consumed in the production cycle. This subtype of fixed assets usually requires modernization and reconstruction more often than, for example, a workshop building.

Patents and other products of intellectual activity are also classified as fixed assets. As well as perennial green spaces and animals, long-term capital investments, knowledge and skills of personnel, unfinished buildings.

This type of asset is periodically revalued to determine its real value, taking into account depreciation. This wear and tear is also called depreciation.

Current and non-current assets are reflected in various sections of the balance sheet. Non-negotiable in the first, negotiable in the second.

Return on company assets

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Calculation formula

Having understood the classification of two types of assets, consider the formula for calculating profitability for both options:

Current assets

Return on current assets = Net profit of the reporting period (in rubles) / Average cost of current assets (in rubles).

called profit after taxes. All indicators for calculations are taken from the corresponding columns of the balance sheet.

Calculated value shows, how much profit accrues per monetary unit invested in current assets. One of the most important indicators for assessing the financial and economic activities of an enterprise, since it is working capital that guarantees the uninterrupted operation of production and financial circulation.

Calculated as a percentage (%) and evaluates efficiency of the company's use of working capital. The higher it is, the more effectively the organization works in this direction.

To conquer new sales markets and expand production, reasonable management of working capital and its rational use are necessary. This indicator is an indispensable assistant to management in achieving this goal.

Non-current assets

Return on non-current assets = Net profit of the reporting period (in rubles) / Average cost of non-current assets (in rubles).

By analogy, the coefficient shows how effectively non-current assets are used.

Balance calculation

To make calculations, a balance sheet and profit and loss account for the same period are required.

Substituting the reporting line codes into the formula, we get:

1. Return on assets = line 2400 of the Profit and Loss Statement / line 1600 of the Balance Sheet.
2. Return on current assets = line 2400 of the Profit and Loss Statement / line 1200 of the Balance Sheet.
3. Return on non-current assets = line 2400 of the Profit and Loss Statement / line 1100 of the Balance Sheet.

For information about this indicator and the procedure for its calculation, see the following video:

Analysis of indicators

The profitability ratio is a very important indicator of the state of affairs in the company; in fact, it is the return on investment.

Calculation result must be positive. If the result is negative, there is reason to be wary; the company is operating at a loss.

At the same time minimum acceptable value indicator for each enterprise individually and the decision to establish it should be made by the company’s management after analyzing the competitive market and the industry as a whole.

It is illogical to compare companies from different industries in terms of profitability. Their indicators cannot be adequately assessed due to the specifics of the business and significant changes in the average return on assets depending on the industry.

For example, depending on the type of business activity, average rates of return on assets:

• Financial sector – 11%.
• Manufacturing company – 15-19%.
• Trade enterprise – 16-39%.

The maximum indicator from the above industries will be for a trading company (due to the small size of the non-current assets indicator). A manufacturing enterprise, on the contrary, has a large amount of assets of this type, so its average return on assets is lower. In the field of finance there is high competition and, accordingly, the lowest value of the indicator.

It is also incorrect to compare enterprises that are completely different in scale with each other in terms of return on assets. A large plant does well at 2%, while a small business in the same field risks going bankrupt at 12%.

Due to the difficulty of comparison on this indicator, conclusion is as follows: a decrease in an enterprise’s indicator from year to year is bad, growth is good. Lower than the industry as a whole is bad, higher is good.

If the indicator worsens due to decrease in net profit, obviously the company is not putting in enough work to earn more.

Another reason is the increase in costs of production and sale of the product (the reason may even be hidden in the irrational use of gas, electricity and water resources).

Problem points may be too large volumes of unsold final product in warehouses, a sharp increase in accounts receivable, and much more.

Based on the above, there is not and cannot be a clear recipe for increasing profitability, and therefore profitability! Each identified situation requires the implementation of its own set of measures.

But the clear conclusion is this: all forecasting, budgeting and planning activities must have one goal - profit maximization! Management must constantly be in search of new solutions to increase income, since measures that are currently effective will sooner or later exhaust themselves.

Net assets are the real value of a company's property assets, which must be calculated annually. The size of net assets is the difference between the value of property on the balance sheet and debt obligations.

Return on net assets reflects how effectively the company's capital structure is managed, as well as the company's ability to efficiently manage its own and borrowed funds.

If the profitability indicator NA is negative, which means that the amount of debt obligations is greater than the value of the company’s property assets.

If, at the end of the year, the size of the private equity is less than the size of the capital, the company will need to reduce the size of the authorized capital to the size of net assets. If, as a result of the reduction, the size of the charter capital is less than the legally established size, the company will be forced to announce its liquidation.

Return on assets based on net profit - formula

The formula for calculating the return on assets based on net profit will be as follows:

Kra = size of net profit / size of net assets.

Return on net assets - balance sheet formula

Kra = s. 2300 second form / (since 1600 ng first form + since 1600 kg first form) / 2, where:

• P. 2300 – line reporting losses and profits (second form);
• S. 1600 – book line. balance (first form).

If you need to estimate the profitability of sales by profit, read on our website.

Return on net assets ratio

The growth of this coefficient can be caused by:

• An increase in the company's net profit;
• Increasing the size of the asset turnover ratio;
• An increase in prices for services provided or goods sold;
• Reducing the costs of manufacturing products or providing services.

A decrease in the indicator may be caused by:

• A decrease in the company's net profit;
• A decrease in the value of the asset turnover ratio;
• An increase in the price of fixed assets, as well as current and non-current assets.

Standard value of the indicator

The return on net assets indicator is the most important indicator for investors, since it reflects the amount of profit attributable to the amount of equity capital. It can be expressed either in cost or percentage terms.

The standard value for the indicator is more than 0. If the value is less than 0, this is a serious reason for the company to think about the effectiveness of its activities. This is due to the fact that the company operates at a loss.

Directions for using the coefficient

The return on assets ratio is used financially. analysts to diagnose the company's performance.

This indicator reflects the financial return on the use of the company's assets. The purpose of its use is to increase its value (taking into account the level of liquidity of the company), that is, using it, the analyst can quickly analyze the composition and structure of the company’s assets, as well as assess their contribution to the formation of total income. If any asset does not bring profit, the best solution would be to abandon it.

Simply put, return on assets is an excellent indicator of a company's overall profitability and performance.

What are the assets of an enterprise, we told in. How to evaluate the efficiency of asset use? We'll tell you in this article.

Return on assets indicators

Return on assets shows how effectively an organization uses its assets. Since the main goal of an organization is to generate profit, it is profit indicators that are used to assess the efficiency of asset use. Return on assets characterizes the amount of profit in rubles that brings 1 ruble of the organization's assets, i.e. return on assets is equal to the ratio of profit to assets.

Naturally, a decrease in return on assets indicates a drop in operating efficiency and should be considered as an indicator signaling that the work of the company's management is not productive enough. Accordingly, an increase in return on assets is considered a positive trend.

For the purpose of calculating return on assets, net profit is often used. In this case, the return on assets ratio (K RA, ROA) will be determined by the formula:

where P P is net profit for the period;

A C is the average value of assets for 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.

By multiplying the KRA ratio by 100%, we obtain the return on assets ratio as a percentage.

If instead of net profit you use the profit before tax indicator (P DN), you can calculate the return on total assets (P SA, ROTA):

And if in the above formula, instead of the total value of assets, we use the net asset indicator (NA), we can calculate not the total return on assets, but the return on net assets (R NA, RONA):

Of course, profitability is calculated not only on assets. If we relate profit to assets, we calculate return on assets, return on sales is calculated as the ratio of profit to revenue. At the same time, in addition to the profitability of assets, the efficiency of their use also speaks.

Return on assets ratio: balance sheet formula

When calculating return on assets ratios, accounting or financial reporting data are used. Thus, according to the balance sheet (BB) and the financial results statement (OFR), the return on assets ratio will be calculated as follows (

The most important indicator here is return on assets (otherwise known as return on property). This indicator can be determined using the following formula:

Return on assets- this is the profit remaining at the disposal of the enterprise, divided by the average amount of assets; multiply the result by 100%.

Return on assets = (net profit / average annual assets) * 100%

This indicator characterizes the profit received by the enterprise from each ruble, advanced for the formation of assets. Return on assets expresses a measure of the profitability of an enterprise in a given period. Let us illustrate the procedure for studying the return on assets indicator according to the data of the analyzed organization.

So, the increase in the level of return on assets compared to the plan took place solely due to an increase in the amount of net profit of the enterprise. At the same time, the increase in the average cost of fixed assets, other non-current assets, as well as 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

Let us present the profitability indicator of fixed production assets (otherwise called the capital profitability indicator) in the form of the following formula:

The profit remaining at the disposal of the enterprise multiplied by 100% and divided by the average cost of fixed assets.

Return on current assets

Profit remaining at the disposal of the enterprise multiplied by 100% and divided by the average value of current assets.

1. Return on Investment

The return on invested capital (return on investment) indicator expresses the efficiency of using funds invested in the development of a given 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).

1. Return on equity

An important role in financial analysis is played by the return on equity indicator. It characterizes the availability of profit based on the capital invested by the owners of a given 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 return on assets and return on equity, this comparison will show the extent to which a given organization uses financial leverage (loans and credits) in order to increase its level of profitability.

The return on equity capital increases if the share of borrowed sources in the total amount of sources of asset formation increases.

The difference between return on equity and return on total capital is usually called effect of financial leverage. Consequently, the effect of financial leverage is the increase in return on equity resulting from the use of credit.

In order to obtain an increase in profit through the use of a loan, it is necessary that the return on assets minus interest for using the loan is 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, interest on the loan.

There is also such a thing as financial leverage, which is 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 return on equity capital in combination with an acceptable amount of financial risk.

In some cases, it is advisable for an enterprise to obtain loans even in conditions where there is a sufficient amount of equity capital, since the return on equity capital 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 to this enterprise. From the point of view of creditors, the profitability indicator (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.