Reasons for declining return on assets

Return on assets reflects the efficiency of the operations of the enterprise and the use of invested capital. Therefore, the drop in this indicator is an alarming signal for business owners.

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

Return on assets - an indicator that allows you to evaluate the results of the core business of the company. It shows the return on each ruble of assets, regardless of the source of their formation. It is calculated as the ratio of net profit to assets of the enterprise.

A deeper picture of the formation of this indicator allows you to get an integrated financial analysis. In relation to the efficient use of assets by the company, the financial analysis system developed by DuPont is most often used. It involves the decomposition of the return on assets formula into several indicators.

According to the model, the rate of return on assets is calculated as return on sales multiplied by the turnover of assets. In this formula, return on sales is equal to the ratio of net profit to revenue, and turnover is the ratio of revenue to assets.

The use of the Dupont model makes two reasons for the decline in return on assets obvious: a decrease in return on sales and a decrease in turnover. Considering these indicators over time, you can determine which one ultimately led to a drop in return on assets.

Analysis of return on assets indicators allows you to identify problem points in the business and develop ways to resolve them.