Return on assets shows the efficiency of production at all levels of the economy

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:48

Fixed assets are of great importance for the efficient functioning of the enterprise. Improving the quality of their use can solve many problems associated with production. Moreover, they affect both a single company and the industry and, ultimately, the economy of the whole country. Efficient use of fixed assets allows you to increase the volume of products, reduce production costs, increasing labor productivity. And this directly affects the increase in return on capital, profitability and, as a result, the growth of the standard of living of society as a whole. To achieve these goals, it is important to regularly analyze the degree of use of fixed capital by the enterprise, using various generalizing coefficients for this. One of the most important in this case is capital productivity. It shows the level of turnover of fixed assets and allows you to determine how efficiently they are used in production. It is this indicator that we will talk about in the article.

Return on assets: definition and meaning

As already mentioned, this coefficient characterizes the level of use of available capital in the enterprise, in the industry and the economy as a whole. It is determined on the basis of two values - marketable or gross output and the value of fixed assets of production.

Return on assets shows how much production falls on a unit of fixed assets, and depending on this, the degree of their use or efficiency is determined. Moreover, the value of the produced goods can have both natural and monetary expression (volume or cost). And the return on assets index itself can be calculated for all funds, and only for a part of them.

Calculation of return on assets: formula

The rate of return on assets can be calculated at different levels of the economy. At the same time, he shows the same thing, namely, the efficiency of production in relation to the use of capital, but on a different scale. At the enterprise level, to calculate this coefficient, the annual volume of products produced by it is taken. At the sectoral level, gross value added or gross output is used, and at the scale of the country's economy, the value of gross domestic product.

The return on assets of fixed assets shows the volume or value of this product per unit (ruble). The coefficient is calculated according to the following formula:

product output / value of fixed assets.

As a rule, the average annual cost of capital is taken, however, a number of authors are inclined to a different opinionregarding this indicator. So, often the formula uses the cost of acquiring these funds (primary) or a value defined in this way:

(funds at the beginning of the period + funds at the end of the period) / 2.

In any case, the meaning of the calculation does not change from this. Return on assets shows the ratio of output to the funds invested in it.

Return on assets and capital intensity

The reverse of the indicator we have considered is the capital intensity ratio. It can be said that these are two sides of the coin. What does the return on assets and capital intensity show to the owner of the enterprise? If the first speaks of the degree of use of fixed assets, then the second speaks of the need for them. The capital intensity illustrates the value of fixed assets attributable to the ruble of the product produced. It is determined by the formula:

1 / return on assets or value of fixed assets / output.

After calculating this coefficient, the owner of the enterprise receives information on how much financial resources need to be invested in fixed assets in order to obtain the required volume of production. If capital intensity decreases, then this indicates labor savings.

Both indicators characterize the effectiveness of the use of existing capital. If it rises, then the return on assets also increases, and capital intensity, on the contrary, decreases. Is this a favorable trend? and every enterprise, one way or another, strives for it.

Factors affecting return on assets

Capital returnshows how well the company is doing. This is influenced by a wide variety of reasons, including those that are outside the production process. Let's see what contributes to the increase in return on assets:

• technical re-equipment, modernization and reconstruction;
• better use of capacity and running time;
• reducing the cost of a unit of capacity at the enterprise;
• change in the structure of funds (growth in the ratio between productive and non-productive assets);
• better capacity utilization;
• market and other factors.

In addition, the improvement of product quality should also be taken into account. Other things unchanged, it also contributes to a more efficient use of capital, an increase in capital productivity and, consequently, profitability.

Conclusion

For effective work at each enterprise, such coefficients as capital intensity and capital productivity should be regularly calculated and analyzed. Such an analysis shows a lot, because it allows you to assess the degree to which an enterprise uses its fixed assets and determine the need for them to achieve certain production goals.