Return on assets is an indicator that is used to calculate the efficiency of operating active assets in order to generate profit for the organization. Let’s understand what economic return on assets is, what this indicator demonstrates, and what is the formula for calculating it.
What is meant by return on assets
When analyzing the financial and economic activities of an enterprise, it is necessary to consider absolute and relative indicators. Absolute indicators are sales volume, revenue, expenses, loans, profit, etc. Relative indicators allow the company to conduct a more accurate analysis of the current financial condition of the organization. One of these criteria is the return on assets ratio (RA).
Return on assets characterizes the efficiency of their use by the enterprise and the impact they have on the rate of profit. Return on assets shows how much profit the organization will receive for each unit of ruble invested in the active component. RA illustrates the ability of capital assets to create profits.
Return on assets is divided into three interrelated indicators:
- ROAvn - Non-current assets ratio;
- ROAob is an indicator for current assets;
- ROA - return on total assets (total).
Non-current assets are the property of an organization, which is reflected in section I of the balance sheet for medium-sized enterprises, and in balance sheet lines 1150 and 1170 for small institutions. Non-current assets can be used by an organization for a period of more than 1 year. They do not lose their technical properties and quality characteristics during operation and partially transfer the cost to the cost of manufactured goods. Non-current assets are tangible, intangible and financial.
Current assets are property that is included in section I of the balance sheet for medium-sized organizations, and in balance sheet lines 1210, 1230 and 1250 for small ones. Current assets are subject to use in a period of less than one year or production cycle and immediately transfer the cost to the cost of products produced by the enterprise. BOTH are also divided into tangible (inventories), intangible (accounts receivable) and financial (short-term investments).
Total assets are the combined value of SAI and BOTH.
How to calculate the coefficient
The general calculation formula is as follows:
To calculate the return on assets ratio, the net profit indicator is often used. You can also use the pre-tax profit option in the calculation and calculate return on total assets (ROT). Profitability formula:
RSA = PDN / Ac,
- PDN - profit before tax;
- Ac is the average value of property assets for the reporting period.
Return on net assets (NA) is calculated using the following formula:
RFA = PDN/CA.
When calculating the PA coefficient, you can also use information from accounting and financial statements as of the current date. According to Order of the Ministry of Finance No. 66n dated July 2, 2010, the return on assets ratio can be calculated using data from the balance sheet and financial statements.
Return on assets - balance sheet formula:
KRA = line 2400 OP OFR / (line 1600 NP BB + line 1600 KP BB) / 2,
- page 2400 OP OFR - PC for the reporting period;
- line 1600 NP BB - the value of assets at the beginning of the period;
- p. 1600 KP BB - indicator at the end of the period.
ROAvn is also calculated based on the balance sheet values and is obtained from the ratio of the profit for the reporting period and the total of Section I (line 1100) of the balance sheet.
Profit is taken from lines 2400 (PF) or 2200 (from sales) of the income statement.
ROA is also calculated by the ratio of profit from the income statement and the average cost of OBA. If it is necessary to calculate profitability for all indicators, then the final line of section II of the active part of the balance sheet is taken for the calculation. In the case when it is necessary to calculate a specific type of OBA, the information is found from the corresponding line of Section II of the balance sheet.
How to parse values
RA is an important tool not only for analysts and financiers who calculate indicators for the effective increase in capital and profit in a company, but also for accountants. A correctly calculated coefficient shows the real current financial condition of the enterprise, which is the most valuable information for inspection authorities (Order of the Federal Tax Service No. MM-3-06/333@ dated May 30, 2007). The standard value for the RA index is greater than zero. Deviation from the norm is established for each industry separately (clause 4 of the Order of the Federal Tax Service No. MM-3-06/333@ dated May 30, 2007). However, as a general rule, it is considered that a deviation exceeding the average industry standard by 10% or more is critical, that is, the financial and economic activities of the institution are problematic and are at a loss.
What dictionary doesn’t dream of being explanatory, what paper doesn’t want to be valuable, and what business doesn’t want to become profitable! But not only business. Its constituent parts - the assets - are also desperately striving for this. In fact, the indicator of their profitability is a summary characteristic that demonstrates not only the practical value of the resource, but also the manager’s ability to manage it. No wonder they say: “In skillful hands, even a board is a balalaika.”
Of course, a lot depends on the chosen field of activity and the environment. Here, the larger the asset, the lower its profitability indicator. Capital intensity, as a rule, is characteristic of those industries whose elasticity of demand for goods is close to zero. Those. The entrepreneur pays for guaranteed sales with a reduced rate of profitability. Vital examples: hydrocarbon production, nuclear energy, or even companies that lay Internet cables on the ocean floor and operate them.
But this is all philosophy in general terms. As for the specifics, calculating the profitability of business components is one of the tools for obtaining management signals for the company's management. This is not always an easy task in terms of labor intensity (accounting will always object), and you may not like the results. But the principle applies here: “Warned in time means saved.”
Formula and meaning of return on assets based on net profit
The formula for the return on assets ratio (KRA in Russian practice and ROA in global practice) is very laconic:
KRA = Net profit / Total value of all assets(in this case, amounts servicing current loans do not take part in the calculation)
If we multiply the value of KRA by 100%, then we get the value of return on assets as a percentage (as you like).
As follows from the formula and from the logic of the name, this indicator reflects the degree of efficiency in the use of assets by the management of the enterprise in the implementation of business processes. The extent to which management utilizes all capabilities to ensure maximum profitability.
If we take into account that in the balance sheet the asset corresponds to the amount of liabilities, this means that it is in this case (this is important) that the formula is acceptable:
KRA = Net profit / (Equity + Borrowed funds)
Thus, the return on total capital is actually analyzed. In this formula, the sum of equity and borrowed funds is in the denominator of the fraction. This means that the higher the volume of accounts payable, the lower the resulting return on assets will be. From a logical point of view, this is fair. After all, in order to provide a business with a certain profitability, there is insufficient capital available, but it is necessary to borrow, this means that the profitability of these very own assets leaves much to be desired.
It is curious that even if the volume of equity is equal to zero, the return on assets indicator will still not lose its meaning. After all, the denominator of the fraction will be different from zero. The situation clearly demonstrates that the return on assets ratio is not just a characteristic of the financial return on investment. Business here is considered as a system and KRA helps analyze the ability of this business to generate profit. The system refers to certain scarce connections, the management abilities of the company’s management, and how managers use the favorable opportunities provided.
It should be understood that return on equity is a qualitative individual characteristic inherent in each business. In this case, the scale of the enterprise is absolutely not taken into account. A business can be a family company - a convenience store, and at the same time have a KRA value close to 1. And there are also examples of transnational oil corporations that are managed very poorly, with a coefficient value below 0.01.
There are popular options for calculating return on assets using EBITDA instead of net profit. EBITDA is earnings before taxes and interest on loans. Naturally, it is higher than the net profit on the balance sheet. This means that the return on assets will also be higher. Correctly, this resembles a kind of “fraud,” a kind of attempt to mislead analysts interested in identifying the true state of affairs in the company (potential creditors or even tax authorities). It is not without reason that in global practice EBITDA is excluded from the official characteristics of the financial condition of an enterprise.
The return on assets ratio is close in meaning to assessing the profitability of the enterprise as a whole. In this regard, it is recommended to use accounting data by year. This is advisable so that the comparison of return on assets and profitability of the enterprise is correct or comparable. After all, profitability is measured in percentage per annum.
The natural desire of any entrepreneur is to maximize the return on assets of his company. To do this you need:
- increase sales margin (profit can be increased either by increasing the selling price or by reducing production costs);
- increase the rate of asset turnover (in order to collect more profit in a certain period of time).
Non-current assets are the property of the enterprise, which is reflected in the very first part of Form 1 of the balance sheet. This type of property is the most capital-intensive. Therefore, it transfers its price to the cost of finished products in parts called depreciation.
According to accounting standards, non-current assets consist of:
- fixed assets (buildings/structures, long-term equipment/tools, communication facilities, vehicles, etc.);
- long-term financial investments (investments, long-term (more than a calendar year) accounts receivable, etc.);
- intangible assets (patents, exclusive licenses, trademarks, franchises and even business reputation).
The coefficient formula in this case is as follows:
KRVneobA = Net profit / Cost of non-current assets (x 100%)
Interpretation of the indicator is very difficult. In fact, the value is the profitability that the presence of these assets (fixed assets) can potentially provide you with the current quality of their management. For entrepreneurs who are already working in this industry, this value may not bring significant analytical meaning. However, for those who are just about to enter the market, the profitability of non-current assets is a key indicator influencing their decision.
It is worth remembering that the return on non-working capital is a conditional indicator. Those. it demonstrates how much you can earn from this equipment, provided that it is properly maintained and managed correctly.
Current assets are the exact opposite of non-current assets. Their useful life is less than a year and their cost is significantly lower. Current assets include all components of cost. At the same time, their price is taken into account in full (and not in parts, as is the case with fixed assets).
Structure of current assets (in descending order of liquidity):
- cash;
- accounts receivable;
- VAT refundable (on purchased inventory items);
- short-term financial investments;
- inventories and work in progress;
Formula for the corresponding coefficient (RCA in international terminology):
KROBA = Net profit / Cost of current assets (x 100%)
The significance of the resulting indicator of profitability of current assets is higher, the fewer fixed assets the company has. Companies operating in the service sector have the closest approximation, and in those areas where there is no need to seriously invest in equipment. Organizations engaged in foreign trade, as well as leasing companies (due to the high amount of VAT refundable) have a reduced coefficient value. In addition, credit financial institutions do not have a high return on assets ratio due to the significant volume of receivables.
The profitability ratios of current (1) and non-current (2) assets should not be considered separately. They acquire much greater information content in the case of joint analysis. The predominance of one value over the other indicates the greater importance of 1 or 2 types of capital in generating company profits. The absolute value in this case plays a much smaller role for the analyst. And of course, when performing an analysis, it always makes sense to keep the return on total assets value at hand. The total coefficient is the profitability of the business, and whose contribution is greater (turnover or fixed assets) shows the prevalence of the corresponding coefficients.
Return on assets on balance sheet
It seems advisable to also calculate the return on assets on the balance sheet. In the denominator of the formula we indicate the balance sheet currency. In addition, we reduce this value by the amount of debt of the founders for contributions to the authorized capital of the organization. The numerator of the fraction still indicates the net profit on the balance sheet (after paying all taxes).
KRAp/b = Net profit / (Balance sheet currency - Accounts payable of founders) (x 100%)
Profitability on the balance sheet characterizes, first of all, the process of reproducing the company's profit. Starting conditions are not taken into account. They mean the authorized capital, as well as the obligations of shareholders (or shareholders) to repurchase it. However, the company's own funds are represented not only by the authorized capital. A significant share of them is accumulated retained earnings. And it just falls into the calculation of return on assets on the balance sheet. This is the key difference in the meaning of this indicator: it does not take into account the initial reserve (UC), but takes into account the results of past production achievements (meaning accumulated profit).
If the return on assets ratio characterizes the assets themselves in terms of their contribution to the overall pot of profit, then the profitability on the balance sheet “assesses” the entire business process as a whole, removing the value of the initial capital. However, it is recommended to consider these two indicators together.
Return on net assets
Net assets are the “property reality” of the firm. The law requires that they be calculated annually. The amount of net assets is calculated as the difference between their value reflected in Form 1 of the balance sheet and the amount:
- short-term accounts payable;
- long-term accounts payable;
- reserves and deferred income.
In fact, net assets can be called the result of the company's activities, including the results of previous ups and downs.
If the value of net assets becomes less than the amount of the authorized capital, this means that the company begins to “eat up” the initial contribution of the founders. If net assets go negative, it means that the enterprise is not able to pay off its debt obligations without outside help. There is a so-called insufficiency of property.
KRCHA = Net profit / Revenue (x 100%)
The return on net assets indicator can be correctly interpreted as the rate of profit for each monetary unit of products sold. And it, of course, directly correlates with the profitability of the enterprise as a whole.
Despite the fact that the value of net assets itself is calculated at the end of the year, their profitability ratio can and should be kept, as they say, on the desktop. This indicator can warn against a catastrophic drop in sales efficiency.
Depending on the field of activity of companies, they have individual values of profitability and return on assets. These are, for example, the values of KRA for the following types of activities:
- Manufacturing sector - up to 20%
- Trade - from 15% to 35%
- Service sector - from 45% to 100%
- Financial sector - up to 10%.
Organizations operating in the service sector have an increased return on their capital due to the relatively low size of fixed assets. In addition, services cannot be stored, so the size of current (current) assets is also small.
Next come trade organizations. Their non-current assets are also, as a rule, small, but warehouse inventories push the turnover of such enterprises to increase. However, their growth is compensated by an increased (relative to other areas) turnover rate. After all, the business of such a company depends on it.
A fairly clear picture emerges with regard to industrial production. The most expensive (among all areas of activity) fixed assets drag down the entire family of profitability indicators.
The situation with credit and financial companies is much more interesting. In an industrial environment, there are not many competitors - they all must have adequate capital (and a significant part must be in kind), and their number is limited. In the service sector there are those who know how to provide them (a serious limitation), in trade - those who were able to establish connections and get discounts. But the financial sector attracts all those who have not found themselves in other areas. Reduced entry thresholds into the industry contribute to an eternal boom, regardless of whether there is current macroeconomic growth or a crisis. Actually, it is the huge number of market participants that reduces to a minimum the overall level of profitability both for individual transactions and for the capital involved as a whole.
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 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 resulting net profit (or net loss) 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 of different 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 1995-2017, %
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 argue that there is no negative value for profitability, therefore, in the case of a net loss, it is necessary to set zero and calculate the loss ratio separately. 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.
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 has borrowed more money and therefore has more debt and proportionately less investment put into the company. Whether this is a positive or negative factor depends on how wisely the first company uses its borrowed money.
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 by 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 have 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.
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 for balance sheet and IFRS
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 value
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.
Loading...