The concept of profitability of assets and the reasons for its decline
Return on assets - an indicator to evaluate the results of the main activities of the company. It shows the impact that falls on each ruble of assets, irrespective of sources of their formation. It is calculated as the ratio of net profit to assets of the company.
A deeper picture of the formation of this indicator provides integrated financial analysis. With regard to the efficient use of company assets most often used financial analysis developed by company "DuPont". It involves the decomposition formula of profitability of assets on several indicators.
According to the model, the coefficient of profitability of assets is calculated as profit margin multiplied by asset turnover. In this formula, profit margin is equal to the ratio of net profit to revenue and turnover - the ratio of revenue to assets.
Using the DuPont model reveals two reasons for the fall of profitability of assets - decrease of profitability of sales and decrease turnover. In considering these indicators in dynamics, you can determine which one is led ultimately to the fall of profitability of assets.
Analysis of indicators of profitability of assets allows you to identify problem areas in business and to develop ways for their solution.
Ways of increase of profitability of assets
The main reason for the fall in profitability of sales (and, accordingly, profitability of assets) is to increase the cost price of produced (sold) products. In this situation the company needs to focus its own efforts on improving the efficiency of cost management. In particular, to determine the most significant components of cost of production and to identify possible ways to reduce them. This, for example, the search for new suppliers of raw materials, reducing energy costs by implementing energy efficient technologies, etc.
Also it is necessary to divide costs in the cost structure into fixed and variable and calculate the breakeven point. It may be necessary to conduct a detailed analysis of the assortment matrix and change the range of products.
Another reason for the fall of profitability of assets can be a drop in sales. It affects the growth of production costs due to increasing share of overheads. If it was revealed that the main negative factors was the drop in sales, the company needs to focus on marketing, price and assortment policy. In particular, it is necessary to assess their own competitive position in the market in these areas.
To increase the profitability of assets and by reducing working capital or fixed assets. To achieve this goal is possible through the sale of inefficient equipment or reduction of non-productive assets; reduction of stocks of raw materials and work in process; and reduce receivables. Of course, it is worth considering the liquidity of assets so as not to upset the balance between working capital and the ability to pay its creditors.