Definition: The return on total assets formula, also known as return on assets, is a profitability ratio which compares the profit a department’s assets make against the amount needed to produce those profits. In other words, it is a comparative financial ratio used by management to evaluate the financial performance of every investment department based on their relative level of assets.
Return on total assets formula can be defined as the profit a company makes by dividing its overall assets by its total revenue. It can also be defined as the profit a company makes by dividing its total cost of capital by its revenue.
There are two main types of returns on assets. These include cost basis and income basis. A company with assets on an asset basis has a lower profit margin than one with a profit and loss account. When the assets owned are unproductive, these companies will have a higher profit and loss account.
There are two kinds of returns. They are known as net or gross. Net returns include sales less costs and include depreciation, interest, and any stock dividends received by the company. Gross returns include gross sales less cost and includes depreciation, interest, and any stocks dividend received by the company.
There are three types of return on assets formulas. They include the following.
The first type is the simple and most commonly used formula. This type of return uses an average profit margin as the basis for calculating profits. The profit margins used in this formula are based upon the assets of a company.
The second type of return formula uses the difference between the actual cost of capital and the market price. The profit made is calculated using a discounted rate.
The third type of return formula, the most commonly used is the discounted cash flow return formula. This type of return is similar to the average profit margin but instead of looking at the cost of capital, the discounted cash flow formula calculates the profit after deducting the expenses associated with owning an asset.
The last type of profit is the income basis formula. It also utilizes cost as a basis for calculating profits. This method of calculation is used to calculate the income statement, balance sheet, income tax return, and statement of cash flows.
The returns on assets formula provides a number of advantages over other forms of calculation for a company’s business. The main advantage of using the formula is that it allows for a more accurate calculation of company profits.
The more accurate a calculation is the better the companies’ profit is. The more accurately a calculation is done, the better the profit margins are. This means the company will have more money available to pay for investments that pay off faster.
Another advantage of the returns on assets formula is the ability to determine the amount of money needed to pay down debt and pay interest. By using this method a company can save a great deal of money on interest.
When a company is struggling to stay afloat, it is common for them to use the returns on assets formula to determine how much to borrow against their assets. This allows them to avoid incurring too much debt.
The returns on cash flow formula is also used by many companies that are looking to buy a business. They use the formula to determine how much they will be able to borrow to purchase a company. Using this type of calculation, a business owner can purchase a business at a discount, thus allowing him or her to keep more of their profits.
The returns on cash flow formula allows for a business owner to control their business. By using this formula a business owner can avoid getting stuck with a business they cannot operate and paying too much in interest.
Finally, the returns on assets formula is used to determine if a company is making a profit or not. The more accurate a calculation is, the more accurately the business is determined to be a profitable.