How to Perform the Return on Assets Analysis
What Can a Return on Assets Analysis Tell Us About Management Productivity?
Is there a way to measure management productivity? More importantly, is there an indicator of how well management uses creative thinking to maximize the return on the company’s assets? In fact, there is. When companies perform a return on assets analysis, or ROA analysis, they are able to gauge how well their managers think outside the box when maximizing the company’s assets. How does a company perform the return on assets analysis, and what does it tell the company about its management’s productivity?
There are essentially two variables needed to perform the analysis. In fact, the calculation itself is very straightforward. It simply involves taking the company’s net income and dividing it by the company’s assets. The resulting figure is then converted into a percentage. Determining whether a company’s return on asset value is high or low really depends on the industry. In this case, there really isn’t any determining factor about whether the ROA analysis value is good or bad. However, this is one of those key financial ratios in business where taking steps to improve the value is far more important than any resulting figure that comes from the calculation.
In order for the return on assets analysis to be relevant, we’ll first show what the calculation looks like. Second, we’ll review the two variables used in the calculation. Finally, we’ll provide some ideas about how this simple equation can be used by management to maximize the company’s assets. The net result will provide you, the reader, with an appreciation of some of the simple approaches a company can adopt to improve its asset utilization. The calculation is expressed below.
- Return on Assets = Net Income / Company Assets
What Are Company Assets?
Assets are always listed on a company’s balance sheet. These include inventory, any cash or securities held by the company, accounting receivables, the company’s machines & equipment, and any other physical asset such as land, office furniture or computers. These assets are extremely important to the company and can be a source of additional income, if properly managed.
How Does a Company Calculate Net Income?
When thinking of a company’s net income, think of a company’s bottom line. In this case, a company’s net income is its total earnings minus the cost of goods sold (COGS), administration expenses, depreciation, operating expenses, interest and taxes. A company’s net income is always found on its income statement.
Understanding the Importance of the Analysis
As mentioned, calculating a company’s return on asset value is nowhere near as important as the actions that must be taken to increase that value. Maximizing a company’s assets requires some of that aforementioned creative thinking. However, there are several great examples where companies not only maximized their assets, but were also able to increase revenue and grow their business into new markets.
One of the best examples of a return on assets analysis, involves Universal Pictures and its decision to turn its feature film sets into a tourist attraction. At the time, film sets were constructed, used in filming and then shut down. The financial outlay to make the films was always seen as something that could be recouped at the box office. By turning these otherwise useless sets into a tourist attraction, Universal dramatically maximized the value of their assets. They have since moved to auctioning off portions of these sets as memorabilia.
Other examples include rental car companies that sell their cars towards the end of their useful life. Still other examples might include an indoor ice rink that charges rent during the summer months for indoor soccer, football or basketball. However, the question remains, what can the average company do to ensure it properly manages the return on its own assets?
Maximize Company Assets & Think Outside the Box
There are myriad ways to derive additional revenue from a company’s assets. Manufacturers with equipment and machinery can rent it by the hour, or use both as training tools for other companies and their employees. Several companies adopt this approach during slower periods of the year when customer demand drops. Some even rent their equipment and machinery to local educational institutions or colleges that help people develop new trades and skills.
Unused warehouse and office space can be rented in order to derive additional monthly income. Some companies with experienced sales and technical service professionals choose to charge consulting fees to help customers get their manufacturing up and running, or to trouble shoot certain business operations. Other companies outsource their accounting capabilities.
A company’s assets can be used for far more than their original purpose. When companies perform a return on assets analysis, they often start to think of different ways to maximize their asset utilization. The best companies are proactive and take steps to not only maximize the return on those assets, but use those ideas and approaches to spearhead new business ventures.
In fact, this approach is often the impetus companies need to expand their business and pursue new markets. All that’s required is management’s willingness to investigate additional revenue sources. This not only requires creative thinking, but the intestinal fortitude to pursue new ideas and deal with periodic setbacks. Nothing is ever guaranteed to work, but almost everything is worth a try.
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