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

Economic 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 (

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? In simpler 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 of 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.

Resume

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.

Return on assets (ROA) is an indicator of how a company manages its existing assets to generate revenue. If ROA is low, your asset management may be ineffective. A high ROA, on the contrary, indicates the smooth and efficient functioning of the company.

Formula for calculating a company's return on assets

ROA is usually expressed as a percentage. The calculation is made by dividing the net profit for the year by the total value of assets. If, for example, a clothing store's net income was 1 million and its total assets were 4 million, then ROA would be calculated as follows:

1/4 x 100 = 25%

Calculating ROA allows you to see the return on investment and assess whether sufficient revenue is being generated from the available assets.

ROA profitability management

The head of the enterprise studies the ROA indicator at the end of the year. If ROA is high, it is a good sign that the company is getting the most out of its existing assets. Comparing it with other indicators, such as return on investment, we can conclude that further investment is advisable, since the company is able to use investments with high efficiency.

Studying low ROA is vital to effectively running a company. If this ratio is consistently low, it may indicate that either management is not using existing assets effectively enough, or those assets are no longer valuable. For example, in the case of the same clothing store, it may turn out that profits can be increased by reducing the retail space, therefore, such an asset as a large area is no longer valuable.

Banks and potential investors pay attention to ROA and ROI indicators before deciding to provide a loan or further investment. If similar companies generate more revenue with similar inputs, investors may flock to them or conclude that management is not managing its assets effectively.

Increase in gross income

ROA can motivate management to use assets more efficiently. Seeing that revenue is not as high as it should be, managers make appropriate adjustments to the activities of the enterprise. ROA can also show what improvements can be made to increase gross income through proper asset management. This is in any case better than endlessly investing in a company, hoping for the best.

Profit is the main thing. Of course, there are people who disagree with this. Some argue that liquidity and cash flow are more important (and too often ignored). But no one will deny that it is necessary to control the profitability of a company to ensure its financial health.

There are several ratios that you can look at to assess whether your company can generate revenue and control its expenses.

Let's start with return on assets.

What is return on assets (ROA)?

In the broadest sense, ROA is the ultra version of ROI.. Return on assets tells you what percentage of each dollar invested in the business was returned to you as profit.

You take everything you use in your business to make a profit - any assets such as cash, fixtures, machinery, equipment, vehicles, inventory, etc. - and compare it all to what you were doing during that period in terms of profit.

ROA simply shows how effectively your company uses its assets to generate profits.

Take the infamous Enron. This energy company had a very high ROA. This was due to the fact that she created separate companies and “sold” her assets to them. Since its assets were thus taken off the balance sheet, the company appeared to have a higher return on assets and equity. This technique is called "denominator control".

But "denominator management" is not always a scam. In fact, it's a smart way to think about how to run a business.

How can we reduce assets so that we can increase our ROA?

You're essentially figuring out how to do the same job at a lower cost. You may be able to restore it instead of throwing away money on new equipment. It may be a little slower or less efficient, but you will have lower assets.

Now let's look at return on equity.

What is return on equity (ROE, from the English. Return on Equity)?

Return on equity is a similar ratio, but it looks at equity, the net worth of a company as measured by accounting rules. This metric tells you what percentage of profit you are making for each dollar of capital invested in your company.

This is an important ratio no matter what industry you're in, and is more relevant than ROA for some companies.

Banks, for example, receive as many deposits as possible and then lend them out at a higher interest rate. Typically, their return on assets is so minimal that it is truly unrelated to how they make money.

But every company has its own capital.

How to calculate return on equity?

Like ROA, this is a simple calculation.

net profit/equity = return on equity

Here's an example similar to the one above, where your profit for the year is $248 and your capital is $2,457.

$ 248 / $ 2,457 = 10,1%

Again, you may be wondering, is this a good thing? Unlike ROA, you want ROE to be as high as possible, but there are limits.

This can be explained by the fact that one company may have a higher ROE than another company because it borrowed more money and therefore had more debt and proportionately less investment put into the company. Whether this is positive or negative depends on whether the first company uses its borrowed money wisely.

How do companies use ROA and ROE?

Most companies look at ROA and ROE in conjunction with various other profitability measures such as gross profit or net profit. Together, these numbers give you an overall idea of ​​the company's health, especially compared to its competitors.

The numbers themselves aren't that useful, but you can compare them to other industry results or to your own results over time. This trend analysis will tell you which direction your company's financial health is heading.

Often investors care about these ratios more than managers within companies. They look at them to determine whether they should invest in the company. This is a good indicator of whether the company can generate profits that are worth investing in. Likewise, banks will look at these figures to decide whether to lend to the business.

Managers in some industries find ROA more useful in decision making. Since this indicator reflects the profit generated from the main activity, it can be used by industrial or manufacturing companies to measure efficiency.

For example, a construction company might compare its ROA to its competitors and see that its rival has a better ROA, even though its profits are high. This is often the decisive push for these companies.

Once you've figured out how to make more profit, you figure out how to do it with fewer assets.

ROE, on the other hand, is more relevant to the board of directors than to the manager, which has little influence on how much stock and debt the company has.

What mistakes do people make when using ROA and ROE?

The first caveat is to remember that none of these numbers are completely objective. Sales are subject to revenue recognition rules. Costs are often a matter of estimation, if not guesswork. Assumptions are built into both the numerator and denominator of the formulas.

Thus, earnings reported on the income statement are a matter of financial art, and any ratio based on these figures will reflect all of these estimates and assumptions. The ratio is still useful, just remember that estimates and assumptions will always change.

Another problem is that you are using a number obtained over a certain period of time (last year's profit) and comparing it with a number at a certain point in time (assets or capital). It's usually wise to take an average of assets or stocks so that "you're not comparing apples and oranges."

With ROE, you also have to remember that equity is book value. The true cost of capital is the market capitalization of the company's shares. When you interpret this figure, keep in mind that you are looking at book value and market value may be different.

The risk is that since book value is typically lower than market value, you may think you're getting a 10% ROE when investors think your return is much less.

You probably won't make an investment decision based on just one of these numbers, or even both of them. They are part of a larger group of indicators that help you understand the overall health of your business and how you can influence it.

The economic activity of each company takes into account two main groups of indicators - relative and absolute. Absolute ones include revenue, sales volume, income. Such indicators can only superficially reflect the company’s activities. 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, and 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 ability of an enterprise to regenerate income without taking into account the capital structure and the correct distribution of financial resources.

If a company's income exceeds its expenses, this does not mean that its activities are successful and efficient. A large production complex with dozens of workshops, and a small company of 5-10 employees can earn an income of a million. In the first case, it is worth thinking about restructuring the enterprise, changing the development strategy, or even... In the second example, the result is obvious - the company is moving in the right direction. As we see, absolute indicators do not always reflect the real picture; management efficiency can demonstrate the ratio of income received to various expense items.

Profitability is divided into several groups:

• non-current assets;
• current assets.

Non-current assets

Non-current assets are the company's property, which is indicated on 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, they do not lose their technical characteristics and are partially redirected towards 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, investments in other companies);
• other funds ().

Current assets

Working capital includes property that 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 their 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 company funds. ROA can also be determined using another method:

ROA = EBI / TA * 100%, Where

• NI – net profit received by company shareholders;
• TA is the totality of all assets.

In other words, ROA shows the amount of income that comes from every dollar of investment. This is a kind of profitability indicator that shows the efficiency of the company.

Calculation example

Based on the results of the work, the total assets of Etal OJSC 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 profitability at the beginning and end of the year, as well as growth dynamics, you need:

1. ROA at the beginning of the year: ROA = 131.70/1267 = 0.10394 or 10.394%.
2. 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: Δ ROA = 11.25%/10.394% = 1.082. The profitability ratio for the year increased by 1.082.

Profitability standards

According to the average performance indicators of enterprises, there are standards that reflect effective economic activity. These standards depend on the specifics of the company:

The highest ROA indicators should be shown by companies that sell goods. This is due to the lack of significant non-current funds. Due to expensive industrial equipment, manufacturing enterprises have more assets, so their profitability rates are significantly lower.

Advice: high profitability indicators can indicate not only the efficient operation of the company, but also indicate increased risks.

For example, a company took out a loan for a large amount, which will affect ROA in the direction of its increase, but this does not yet indicate the effective distribution of the money received. Therefore, when analyzing the financial activities of an enterprise, it is necessary to take into account borrowed funds and analyze financial stability and the structure of all expenses.

Factors that determine profitability

ROA is a summary indicator of a company's performance when analyzing the ratio of expenses and profits. But it is influenced by both 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 relationship between supply and demand.

Internal organizational factors include:

1. labor productivity;
2. technical indicators, equipment power;
3. method of organizing the production cycle;
4. management decisions, etc.

1. acceleration of trade turnover;
2. increase in product costs;
3. minimizing costs.

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, defects, and crisis events that reduce demand. Sometimes it’s easier to sell a business and invest the proceeds in.

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Return on assets is one of the most important indicators of enterprise performance. It is most often used by business owners and managers to determine work strategy, and by investors to evaluate alternative projects. Analysis of this indicator is an important point in any business plan, which opens up prospects for growth and development.