Return on assets - an important indicator of the efficiency of production

One of the most important characteristics of the activity of any company is to make a profit.However, the presence of profit can not accurately judge the effectiveness of the company, since it is an absolute indicator.To make valid conclusions can be based on the profitability that are relative and primarily characterize the efficiency of the use of certain resources.The organization aims to use one part of the assets in order to influence the other, and the result is products.Thus, it is important to determine the profitability of a particular part of the assets: the profitability of fixed assets, current assets, or, for example, all of the assets as a whole.

In many enterprises the entire production process depends on certain fixed assets, which means that they must be used as efficiently as possible.We define the degree of effectiveness by calculating an indicator of profitability, which divide the net profits earned by the company, the value of its fixed assets.For added convenience, the figure can be expressed as a percentage.Return on assets shows that any amount of net profit per each unit of their value.

As you can see from the calculation method, the indicators used in the numerator and the denominator come from the different reporting forms, with associated difficulties.The fact that the net profit in the statement of profit and loss (income statement), calculated on an accrual basis and represents all profits received during a certain period.On the other hand, the value of fixed assets presented in the balance sheet represents the value of a certain date, therefore, it could change over time.If you want more than just calculate the return on fixed assets, you can use its value at the end of the period.However, more properly be used in the calculation of the average cost for the period.

Fixed assets represent a portion of a property, but absolutely nothing prevents assess the effectiveness of the use of the entire value of the assets.Return on assets can be determined exactly in the same way by the ratio of profits to the value of the property.The only difference is that sometimes in the numerator used profit before tax instead of net income.In the calculation of this indicator, too, do not forget to pay attention to what the value of the value of assets used: the middle or the end of the period.

Efficiency of property characterized the company as a production facility, but does not show the extent to which it is profitable for the owner.To assess this resort to the study of the return on equity.Obviously, it is calculated as the ratio of net income earned in the cost of capital ownership.The magnitude of the passive usually rarely changes, so the problems as in the case of the asset will not.

categories considered factors can not be compared with normative values ​​because of their absence.Agree, it is difficult to limit the profitability of assets by some certain values, because all businesses are different, and one can obtain large profits with little or no assets, and more - hardly will break even in the presence of expensive equipment, buildings and the like, solely on the basis of featuresproduction.In this context, profit margins are usually compared over time, as well as with industry averages.Also worth noting is that the return on assets and return on equity are usually subjected to factor analysis using the methodology and formulas of the company DuPont.