Are Your Assets Working for You? The Return on Assets Ratio

Are Your Assets Working for You? The Return on Assets Ratio

Be Sociable, Share! Tweet This Return On assets post is the fifth post in a series of articles about financial ratios. Which Company is Worth More? Let us assume you are interested in purchasing a company that makes bicycles here in the USA. You have narrowed your search to two companies. Remarkably, net profits from both companies are almost identical, varying by only $2,500. Company One has net profits of $235,000 and Company Two has profits of $237,500. Each company is asking $1,000,000 in an asset only sale. You are confused, which should you buy? The Return On Assets Ratio One way of sorting the wheat from the chaff in this example is to look at Return On Assets. Return on Assets determines how efficiently a company is using its assets to produce profits. Often, asset heavy companies such as an airline, produce low profits on large amounts of assets. Their capital intensive nature demands large investment in assets before any profits are seen. Less capital intensive companies, such as a bagel shop, may produce large profits on a small amount of assets. So Let’s Examine the Targets In the case above, let’s assume average assets for 2013 (beginning year total assets + ending year total assets from the balance sheet divided by 2) for Company One is $560,000 and Company Two is $730,000. Return On Assets for Company One is 0.42. Return On Assets for Company Two is 0.33. Company One had a slightly lower net profit but more efficiently used its assets to manufacture those profits. All other factors being equal, and they never are, Company One should be able to expand its...
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