Return on Assets
One of the performance ratios used in business identifies the overall ability of management to efficiently utilize resources to generate a profit. Corporate resources include human knowledge/skills and the balance sheet assets of the business. The labor component is unquantifiable in terms of dollars, but assets with a dollar value associated with them are reflected on the balance sheet. The return on assets measures management’s ability to earn a profit on these balance sheet assets. This is very similar to your private retirement plan, you have an initial investment which is stated in dollars and any growth generated during the investment period is the return on that investment. In business, it is very similar, an investment exists in the form of assets, any value returned during the year in the form of net profit is the return on those assets.
The formula is relatively simple, however it isn’t necessarily a pure formula. There are important variables with the formula including non-performing assets, accelerated depreciation and the impact intangible assets have on the results. In addition,
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