What Is a Return on Net Assets?

Malcolm Tatum

A return on net assets is a calculation that aids in evaluating the financial success of a company. This basic calculation is determined by identifying the total net income generated by the business during a specified period of time, then dividing that amount by total fixed assets and the net working income that are also relevant to that period. Using this type of formula helps companies get a better idea on how well those available resources are being used in the business operation in terms of generating profits.

Man climbing a rope
Man climbing a rope

The first task in determining the return on net assets is to ascertain the amount of net income realized during the period under consideration. Net income is usually defined loosely as whatever profits are left after operating expenses and taxes have been deducted from that income. A low amount of net income will mean that the return on net assets will also be somewhat low, a situation that would prompt business owners and manager to re-evaluate the operation and determine if there are ways that the operation could be streamlined and reduce operational costs, as well as address ways to increase sales and generate a higher volume of revenue.

It is also important to make sure that the figures for fixed assets and net working capital are kept up to date. This means that it is important to note any changes in either of these figures that may have occurred during the course of the period under consideration, and adjust those figures accordingly. Failure to do will lead to an incorrect calculation that does not truly reflect the current performance level of the company.

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Businesses will usually calculate a return on net assets on a fairly frequent basis. This is especially true when sales figures are somewhat erratic and income levels tend to vary from month to month. Taking the time to quickly determine the return on net assets as soon as an accounting period is closed makes it possible to identify trends with this type of return and make use of that information in the upcoming period.

For example, if the return on net assets is noticeably lower than the previous period, steps must be taken to determine the origin of the decrease. Once that information is collected, it is possible to project the likely impact in the current period, and possibly take actions that will minimize any negative impact those factors may pose to income levels. This approach makes it possible to address issues that threaten to undermine the performance of the company before more damage is done, and to pave the way for reversing an undesirable trend.

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