How can a company increase its return on total assets?


Return on total assets (rota) a financial indicator used in corporate Finance to evaluate how effectively a business uses its assets to produce earnings by comparing their profits before interest and tax (ebit) to total net assets. All that the company spends money, should be beneficial to efficiency in some way.

Lowest ratio of the company is evidence that the company has anemic profits or investments in the assets that were not properly a contribution to the bottom line. This makes the company less attractive to lenders and shareholders, so the prudent business strategy aimed at optimizing this ratio.

How to improve company

Although the definition of a healthy company varies from industry to industry, there are two ways any business can improve their performance to increase profit or decrease in total assets.

Increase Profits

The numerator of the calculation of the company’s ebit. This profitability metric indicates how much remains as profit after accounting for all expenses except taxes and interest payments on debt. Ebit reflects operating profitability of the company, except those obligations for which the company is liable regardless of income.

Since ebit accounts for all expenses except taxes and debt payments, there are several ways to increase this number. Increasing production or increasing sales price will increase profits, assuming that sales remain constant. To find cheap sources for materials needed for the production of goods for sale lowers the cost of goods sold (cogs), leaving most of the revenue to cover operating expenses. Examples of what operating costs can be reduced by switching to a cheaper part of the city, the reduction of objects to the minimum necessary or the exclusion of staff.

Although there are many ways to increase revenues or reduce costs, each has its consequences. Increasing prices risks losing their customers. Increased production runs the risk of letting the inventory sit on the shelves if supply exceeds demand. Reducing the cost of materials may require lower-quality product, which can mean losing sales to a competitor that does not cut corners. The changing locations and reducing the number of employees has a huge impact on the people who work for the company and the reputation of business in society. Although the increase in income may seem easy on paper, these types of decisions require careful analysis.

The Decline In Total Assets

Another option to increase the company the company is reducing the total amount of net assets. To calculate net assets, deduct the cost of depreciation of fixed assets and accrual of reserves on doubtful debts from the total assets of the company. There is not much to be done about the depreciation of assets or the possibility that debtors will default on payments, which leaves a reduction of the initial total assets.

Total assets include everything the company owns, including fixed assets such as equipment and real estate, and liquid assets such as cash and marketable securities. In an attempt to try to raise his company, the business will look at all their holdings to determine which assets do not contribute to efficiency. Selling fixed assets such as vehicles or equipment that are not used, and then rent or lease as needed is an effective way to reduce the cost of equipment.

The inventory also has a significant impact on the assets, so maintaining production levels in accordance with sales ensures that unnecessary reserves are not unreasonably inflating the amount of assets.

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