Ratio Analysis: Evaluating Asset Efficiency

We know that PPE are value creating assets: PPE drives profitability. There is a ratio that measures how efficiently a company is using the assets in their possession to generate profit: return on assets (ROA)Return on Assets (ROA):
A ratio measuring efficiency of asset use in generating profit. Calculated as net income divided by average total assets..

Of course, higher return on assets is preferable. It means that the company is generating more value with the assets they have in place. Or alternatively the company is generating the same level of profit with fewer or less expensive assets.

Here is an example of how to calculate and interpret ROA, then you can do it yourself.

My Turn:

Betty’s Bees has compiled the following financial information for 20X2 and 20X3 to determine Return on Assets (ROA):

	20X2	20X3
Total Assets	1,200,000	$ 1,400,000
Net Income	90,000	$ 96,000

ROA has declined from 20X2 to 20X3. This means Betty’s Bees is utilizing their assets less efficiently and generating less value with the assets in place from 20X2 to 20X3.

Now try on your own:

Well done! That’s the end of PPE. You’ve learned how to calculate the cost of PPE assets, why land isn’t depreciated but all other capital assets do depreciate over time, how to choose a depreciation method, and how to calculate depreciation. You also know where to find depreciation on the financial statements and how to evaluate the return a company makes using its powerful value-creating assets. It has been a fun ride!

In the next chapter we’ll look at debt. It promises to be intriguing, so I hope you’ll join me 😊