Return on Assets
Along with the return on equity, the Return on Assets is one of the most fundamental measures of business profitability. It takes pre-tax profit, adds back the interest expense and uses the result in a ratio against the assets of the business. What it tells us is the return generated by the assets (which have been averaged over the period) for those who funded the assets, these being the stockholders (pre-tax profit) and creditors (interest expense).
Why is the Return on Assets relied on so heavily? This is because it is a simple indicator to calculate while giving great insight into the success of management to those who fund, or own, the business but are outside of management. After all, the money shareholders or creditors invest in the business is allocated by management in the purchase on income generating assets. That is, the normal lifecycle of a business is that (a) it raises funds (b) invests in assets (c) makes a return on those assets (d) gives back the returns to those who funded the assets. Thus, you want to know (as a creditor, investor or manager) that the income-generating aspect of the business is generating a decent return. If asset allocation decisions are good and the assets are run well, then the Return on Asset figure will also be strong.
The result is a percentage. So if you have a Return on Assets of 23% this means for every dollar of assets in the business, 23% (or 18 cents) of that is available as a return for those who fund the business.
Return on Assets Formula
Earnings before Interest & Tax / ((Assets this Period + Assets last Period) / 2)
Return on Assets Calculator
The calculator asks for:
Earnings before Interest & Tax (EBIT), which is found on the income statement.
Assets at the Start of Period, which is found on the previous balance sheet.
Assets at the End of Period, which is found on the current balance sheet.
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