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Reasons for the decline in return on assets

The reasons for reducing the return on assets

Return on assets reflects the effectiveness of operational activity of the enterprise and use of invested capital.

Therefore, the fall of this index is an alarming signal for the business owners.

The concept of return on assets and the reasons for its decline

Return on assets - an indicator that allows you toevaluate the results of the main activities of the company. It shows the impact, which falls on every ruble assets, regardless of the sources of their formation. It is calculated as the ratio of net profit to the assets of the enterprise.
A more profound picture of the formation of theindex allows you to get an integrated financial analysis. With regard to the efficient use of assets now most commonly used financial analysis system developed by the company "DuPont." It involves the expansion formula of return on assets for several indicators.
According to the model, the profitability ratioassets is calculated as the profit margin multiplied by asset turnover. In this formula, the return on sales is the ratio of net profit to sales and turnover - against revenues to assets.
Using the DuPont model makes evident tworeasons for the fall of return on assets - decrease in sales margins and reducing turnover. Considering these indicators over time, you can determine which one is led to the eventual fall of return on assets.
Analysis of return on assets indicators reveals the problem areas in business and to develop ways to resolve them.

Ways to improve return on assets

The main reason for falling sales profitability(And, consequently, the return on assets) is to increase the cost of manufactured (sold) products. In this situation, companies need to focus their own efforts on improving cost management efficiency. In particular, to identify the most significant components of the cost of production and to identify possible ways to reduce them. This, for example, to search for new suppliers of raw materials, reducing energy costs by implementing energy-efficient technologies, and so forth.
Also it is necessary to divide the costs of the structurecost into fixed and variable and calculate the break-even point. It may be necessary to undertake a detailed analysis of the product mix and change the range of products.
Another reason for the fall in return on assetsIt may be a drop in sales volume. It affects the growth of production costs due to an increase in its share of overhead costs. If it was found that the main negative factor was the fall of it sales, the company should focus its attention on the marketing, pricing and assortment policy. In particular, it is necessary to assess their competitive position in the market in these areas.
Increase the return on assets as possible and byreduce working capital or fixed assets. Achieving this goal is possible through the sale of inefficient equipment or reduction of non-productive aktivov- reduce feedstock production- and work in progress and reduce accounts receivable. Of course, this should take into account the liquidity of the assets, so as not to disrupt the balance between current assets and the ability to pay its creditors.

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