A return on total assets is a measurement of the earnings generated by a business before taxes and interest are assessed against the total net assets of the company. The idea behind this type of evaluation is to determine if the business is utilizing its assets to best advantage, in terms of generating income. Calculating the return on total assets also makes it easier to determine if that usage of assets could be enhanced in some way to increase the amount of earnings generated.
The basic strategy to determining a return on total assets, or ROTA, is to begin with the net income figure that is found on the income statement for the period under consideration. Any interest or taxes that were paid during that same period is added back to the net income figure, making it possible to identify the earnings before interest and taxes, or EBIT. The resulting EBIT is divided by the total net assets of the business, with total net assets representing the total worth of assets less any depreciation incurred during that same time period and allowing for any bad debts that were incurred during the period. The result of the calculation makes it possible to determine the amount of earnings that were generated through the use of each dollar of assets owned by the company.
Once the return on total assets is determined, business owners must decide if that ratio is acceptable, or if there is a need to look more closely at how assets are being used to generate revenue. This typically requires the business to establish some type of benchmark that can be compared to the ROTA for a given period. If the return on total assets compares favorably with that benchmark, then there is a good chance that the company is using its assets efficiently, and there is not a pressing need to make any changes in policies of procedures. Should the ratio not compare favorably with that benchmark, the company will need to look closely at each area of the business operation to determine how the use of its assets can be improved.
Depending on the culture of the company, a return on total assets may be determined on an annual basis. Some companies will calculate this type of ratio on a semi-annual or a quarterly basis. The more frequent calculation has the benefit of allowing businesses to quickly respond when the figures indicate that assets could be used to better advantage. For example, if the quarterly assessment shows there is room for improvement, those changes can identified and implemented in the next quarter, hopefully positioning the business to generate a more attractive return on total assets for the overall business year.
