Home / Business / Business management / REASONS for lower return on assets

CAUSES OF DECREASING ROUNDABILITY OF ASSETS

/
120 Views

The reasons for the decline in return on assets</a>

The return on assets reflects the effectiveness of the company's operational activities and the use of invested capital.

Therefore, the fall of this indicator is a worrying signal for business owners.

The concept of profitability of assets and the reasons for its decline

The return on assets is an indicator that allowsEvaluate the results of the company's core business. It shows the return, which falls on each ruble of assets, regardless of the sources of their formation. It is calculated as the ratio of net profit to the assets of the enterprise.
A deeper picture of the formation of thisIndicator allows you to obtain an integral financial analysis. With regard to the efficiency of the use of assets, the company most often applies the financial analysis system developed by DuPont. It involves the decomposition of the formula for profitability of assets by several indicators.
According to the model, the coefficient of profitabilityAssets is calculated as the profitability of sales, multiplied by the turnover of assets. In this formula, the profitability of sales is equal to the ratio of net profit to revenue, and turnover is the ratio of revenue to assets.
Using the DuPont model makes twoCauses of falling profitability of assets - a decrease in profitability of sales and a decrease in turnover. Considering these indicators in the dynamics, you can determine which of them ultimately led to a fall in the profitability of assets.
The analysis of profitability indicators of assets allows you to identify problem points in the business and develop ways to resolve them.

Ways to improve return on assets

The main reason for the decline in profitability of sales(And, accordingly, profitability of assets) is an increase in the cost of manufactured (sold) products. In this situation, the company needs to emphasize its own efforts to improve the management of costs. In particular, to determine the most significant components of the cost of production and to identify possible ways to reduce them. This, for example, is the search for new suppliers of raw materials, the reduction of energy costs through the introduction of energy-efficient technologies, etc.
Also worth sharing the costs in the structureCost per constant and variable and calculate the break-even point. Perhaps, it is necessary to conduct a detailed analysis of the assortment matrix and change the range of products.
Another reason for the fall in return on assetsMay be a fall in sales. This affects the growth in the cost of production due to an increase in the share of overhead costs. If it was revealed that the main negative factors was precisely the decline in sales, the company should focus its attention on marketing, price and assortment policies. In particular, it is necessary to assess own competitive positions in the market in these areas.
Increase the return on assets can be achieved throughReduction of working capital or fixed assets. Achieving this goal is possible by selling inefficient equipment or reducing non-productive assets-reducing raw materials and work in progress-and reducing receivables. Of course, at the same time it is necessary to take into account the liquidity of assets, so as not to disrupt the balance between circulating assets and the opportunity to pay off creditors.

CAUSES OF DECREASING ROUNDABILITY OF ASSETS Was last modified: June 21st, 2017 By Seiraatb
It is main inner container footer text