Return on Assets Ratio and QuickBooks 2013 - dummies

Return on Assets Ratio and QuickBooks 2013

By Stephen L. Nelson

The return on assets ratio is one of several profitability ratios you can use along with QuickBooks 2013 to analyze your profitability. The return on assets shows the return that the firm delivers to stockholders and the interest that the firm pays to lenders as the percentage of the firm’s assets. Some businesses use return on assets to evaluate the business’s profitability. (Banks do this, for example.)

The actual formula is

(net income + interest)/total assets

Suppose, for example, that a business’s net income equals $50,000 and interest expense equals $10,000. Total assets equal $320,000. The formula to calculate this firm’s return on assets is

($50,000 + $10,000)/$320,000

This formula returns the value 0.188. This value indicates that the firm’s return (including both net income and interest) on its assets is roughly 19 percent.

No guideline exists for what a return on assets ratio should be. The main consideration is, predictably, that the return on assets must exceed the capital charges on the assets.

Capital charges aren’t complicated to understand. The bottom line is that a firm needs to deliver a return on its assets that exceeds the funding sources cost for those assets.

In other words, if (on average) the creditor and shareholders providing money to a firm want something less than, for example, 19 percent, and the firm can earn 19 percent as its return on assets, that’s really good.

If, on the other hand, the return on assets percentage is 18.8 percent, but the funding sources for those assets cost 20 percent, well, that’s not so good. That firm is in trouble.

The term capital charge just equals the sum of the minimum profit that shareholders require to invest their money in a firm and the interest charges that lenders require for the money that they’ve loaned to the firm.