How to determine the profitability of non-current assets?

Each money Manager must assess the firm's performance. This will help to draw conclusions not only about efficiency but also about the performance of firms that will be useful in making subsequent management decisions. Perhaps one of the most convenient and simplest ways of assessing efficiency is the calculation and analysis of indicators of profitability. Due to the fact that the company is characterized by a huge number of parameters, these parameters is also quite a lot: the return on assets, return on sales and probably a couple dozen.

If we open the balance sheet, in the first section, we will see non-current assets. As a rule, in this section, a large portion fixed assets, that is, that property which serves the activities of the company over the long term. The remaining articles in this section is also important, and so important is the measurement of this property. This will help us return on non-current assets. This index is calculated similarly to all other indicators of profitability: you need to make a fraction, the numerator of which will profit and the denominator of – the cost of non-current assets.

The Most simple and commonly used calculation is based on net income. As you know, this indicator is provided in the statement of profit and loss. The peculiarity of this form of reporting, and consequently, all of the indicators is that the information there is cumulative, that is, the values presented for the certain period. This fact is not very consistent with the fact that the denominator is the value of the assets given at a certain date. This discrepancy can lead to some errors in calculations that can be quite significant. To most accurately determine the profitability of fixed assets required to set their average value over the period, and its use in the calculations. If information to determine the average value, we can use the value of these assets at the end of the period, but the accuracy of this calculation, again, will be lower.

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Now it's time to talk about the economic sense of this indicator. The profitability of non-current assets shows how much profit brings every ruble of their value. In other words, the indicator allows to assess the effectiveness of the use of the property, which the firm expects to operate quite a long time.

Obviously, in addition to non-current assets balance includes the revolving. Their profitability also can be identified easily, and the difficulties in its calculation similar to those we have examined previously. After calculating the profitability of each of the assets individually, it makes sense to determine the overall profitability of the business property, that is, the efficiency of its use.

As for the analysis of these indicators, it is most often resorted to method comparisons. Comparisons can be made with values from previous periods to determine trends. Also often compare the profitability of one company with the same indicators of competitors or similar companies and from industry average levels. It should be noted that for analysis of this group of indicators do not apply normative comparison for the reason that the rules have not been set.

By elementary transformations of equations that is the mathematical model, it is possible to identify those factors that affect a particular industry. After that you should calculate the separate impact of each factor. This procedure is called factor analysis and can be put as the profitability of non-current assets and working capital, and all collectively.