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Return On Total Assets Ratio

This ratio measures the relationship between net profit and total assets. It is also called profit to assets ratio and is expressed as percentage. The objective is to measure the profitability of the total investment s of a firm. In other words, the idea is to find out how efficiently the assets have been used by the management. Components: There are two components of this ratio-net profit and assets. The concept of profit for this ratio means net profit after tax plus interest. The assets include current assets and fixed assets excluding fictitious assets like preliminary expenses, advertisement suspense account etc. The income is earned on the total assets of the business and the assets may increase or decrease during the year. It is, therefore, useful tot calculate average amount of the assets  used. The average may be calculated by adding the opening balances of assets and closing balances of the assets and the dividing them by 2. Formula: The ratio is calculated.

as :      Net Profit after taxes + Interest / Average Total Assets x 100

Interpretation: This ratio shows firm’s ability of generating profits per hundred rupees of total assets. A higher ratio shows the efficiency of management in making efficient use fo the total assets. This ratio, however, does not disclose the profitability of different sources fo funds which are used to purchase the total assets.

Operating Net Profit to Total Assets Ratio : The ratio is expressed as a percentage of operating net profit tot total assets. The calculation is:

Operating Net Profit / Average Total Assets x 100

Components: The operating net profit is arrived at after adjusting the net profit so as to exclude the items of an unusual nature that are not expected to recur with regularity e.g., loss by fire. Similarly, the dividends and interest earned on investments should be excluded.

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