The return on total assets can show if the managing team is effective at earning money from the company’s assets in a certain amount of time. Stating the obvious now, the company assets are used to generate money. But to buy assets, you need money. So, this ration is again, used to show how much money you need to buy assets. Basically, it similar to a return on investment.
In simpler terms, the company invests money into assets and gains profit. With the title being explained, let’s go further into the problem and see the formula used to calculate the Return on Assets.
Return on Assets Formula
First of all, you will need the average of the total assets of the company. After you’ve figured out the number, the formula will imply dividing the net income to the average of the total assets. The formula will look like this:
Simple, but efficient, this formula will be the main tool to help you get a better idea of what money your assets are bringing. You are probably wondering why the formula is dividing on the average total assets and not on the total assets. The average is used because the total assets could vary from one year to another. However, if you use the total assets number, you’ll get a wrong result, but not totally wrong. You will get just a slight idea, but not the exact result you were hoping for.
Analyzing the Formula
The above formula is used to get an idea of what amount of money you have after you invest in various assets. Some investors can get an exact idea of what the profit is by adding into the formula the interest expense.
Analyzing the results of the calculation is simple. Getting a higher return to assets ratio means that the company is effective at investing its money into assets. Thus, the company is successful. This ratio is also used to compare companies of the same domain to see if you are more successful with your assets as compared to the competition. Getting a good market analysis will bring you a better idea of what you’re doing wrong when buying assets and if they are effective. A positive return to assets can also show you a trend on what you’re investing in.
There are many uses for this ratio, from getting a certain number on your investment on assets to getting a chart going. A chart on return to assets will get you a birds-eye-view on how you did with the company from years back to the present.
To conclude the above information, you should know that assets are, obviously, used to receive profit. Basically, the return on assets ratio is an important piece of calculation and will get the best out of your investment on assets. Everything is about profit, but if you get a higher return on your investment, it means that you’re on the right track.