The return on total assets or return on assets is used in balance sheet analysis. It shows how efficiently a company has used its capital within a certain period of time. In this article, you will find out exactly what the return on assets means and how the key figure can be used.
What is the return on assets?
The return on assets is a popular key figure among investors. It can indicate how efficiently a company has invested and describes the Interest of the total capital employed.
In principle, the following applies: The higher the return on assets, the more efficient a company has invested its capital. A very low return on assets can be a warning signal and be interpreted negatively. Debt and equity are taken into account here.
The indicator can also be used by companies themselves. This enables them to find out how attractive the Group is for investors is. In both cases, the return on assets is a meaningful indicator.
Return on assets Formula
The following formula can be used to calculate the return on assets:
The calculation gives you an indication in percent. The Total capital consists of the addition of borrowed capital and equity. With the Profit is the net profit for the year from the income statement after taxes have been deducted.
Return on assets Indicative value
The amount of 10 to 15 percentt is often regarded as a benchmark in corporate strategy. However, attention must also be paid to the sector in which a company operates and which Developments in this Industry have occurred in the recent past. It is therefore advisable not only to look at the value of a company, but also to compare it with groups in the same sector.
In principle Highest possible values desirable. In addition to efficiency, the ratio also provides a certain amount of information about the profitability of a company. If the value is too low, for example if it is below the average interest rate for borrowed capital, an investment is rather unattractive.
Particularly low values can also be achieved with Risks go hand in hand. This may be a sign that the Liquidity of a company not guaranteed and a loan cannot be repaid in this way. It is in the interest of companies to keep this value as high as possible in order to be attractive to investors and lenders.
Return on assets interpretation - advantages and disadvantages
One advantage of the return on assets ratio is that all of a company's investors are taken into account. In addition, an investor receives a meaningful assessment of the interest rate. The key figure is also suitable for Compare with other companies. Also a cross-industry Comparison is possible.
For growth companies and service providers, the Limited informative value which is a disadvantage. Many of the values tend to end up as expenses in the income statement. In addition, the overall return on capital of a Influence are subject to a corresponding balance sheet policy.
Increase the return on assets
In order to increase the overall return on capital, companies can increase the Reduce capital commitment. For example, you can outsource activities with a high capital commitment or sell non-essential goods. In addition Interest rates reduced by a company changing banks or through debt restructuring.
In addition, a Group can use the Net income for the year through various measures increase. This can be achieved by reducing costs by hiring temporary workers, for example, or by increasing productivity through modern technology. Sales growth can also be increased by tapping into new markets or introducing new products.
Conclusion: Calculating return on assets
The return on assets or total return on capital can provide investors and companies with an overview of this, how efficiently a company invests its capital has. The higher the amount, the better and more efficiently a group has used its capital.
As a guideline 10 to 15 percent The average is dependent on the industry. Low values can be a Warning signal and indicate low liquidity. High values make a company attractive to investors.
There are different ways to Increase return on assets. Interest rates can be reduced, capital commitment can be lowered or net income can be increased through various measures.