Return On Assets
Posted by norrisl4 on October 1st, 2009
This measure is key indicator of productivity and operating efficiency.
This looks at the relationship between a business’s resources (its assets) and its net profit. It is one measure that is sometimes used to gauge management performance. The reasoning behind this is that a consistently high return on the business’s assets requires considerable management skill and ingenuity.
The formula is as follows
Net Profit Before Tax
Total Assets
Net profit before tax is the preferred numerator because it eliminates the distortions that can arise from different tax regimes or different tax strategies.
A low or decreasing ratio may ring alarm bells to your banker as this may indicate a lack of proactive management or even unsustainable operations. Where possible, a low ratio can be remedied by generating more sales per dollar of assets.
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