Return on Assets

The Return on Assets equation measures the profit generated from each dollar of assets. When Net Profit is divided by Total Assets they display Return on Assets. A Higher return on Assets is better. There are two ways to increase return on assets, by improving either of its two specific parts. They can charge higher prices for products and increase revenue, lower operating costs or costs of goods sold, or increase the actual asset turnover rate.

However, return on assets can be too high for a company’s own goods. Return on assets that are too high means that a company isn’t properly preparing for the company’s future. These companies are failing to purchase new equipment, plant, and property that will strengthen the company in the future. Additionally, if Return on Assets is too high it may indicate manipulations of assets on the balance sheet. A common investment con is to make assets appear lower than their value, omit them from the balance sheet, or hide them in subsidiaries but include the results of their profit. This manipulates Return on Assets into appearing higher than it is. This gives the firm an appearance of health that isn’t actually found anywhere within the company and dupes investors into purchasing shares of the company. This drives up the price of shares and options held by management which is later sold for profit.