Return on Assets (ROA) - Explained in Hindi | #31 Master Investor - YouTube

Subscribe to the Asset Yogi channel

And press a bell icon,

To watch the latest finance videos before everyone

Namskar, I'm Mukul and welcome to asset yogi

Where we unlock the knowledge of finance rather locking it

This video is part of a series

In which we discuss the analysis of the financial ratios

Look, when you analyse a stock

Or compare the performance of a company

With its competitors

So you have to calculate the return on investment

That, how much capital investment in it,

How much return do you get on it

Or to the owner or shareholders

I already made a basic video on return on investment

If you want to watch it, the link is in the description below

The Return on investment can be calculated in various ways

For example, one is the return on equity

Means, Return on the capital invested by the owner or investors

Second, is the Return on capital employed

Which we call "ROIC" or "ROCE" in the short form

Which tell the return on the total capital

I already made a detailed video on both these topics

You can also watch it, the links in the description below

The third is the Return on asset

Which we will discuss in this video

By return on assets, we know

Which company well utilize its assets better

Meaning how quickly they can produce more from their assets

That means mean its returns are higher

Maybe Other company does not utilize their assets well

Many of its assets are idle

Naturally, the Return on assets of it come down

In this video, we will understand how the calculation of return on assets is done

And how we the compare return on asset of 2 or 3 companies and what does it mean

Please watch the video from beginning to last

Let's move straight towards the blackboard

Here we discuss the profitability ratios

In profitability ratio, there are two types of ratios,

As we have talked about earlier

One is the Return on sales

Second is the Return on investment

In return on sales gross profit margin, operating profit margin

And net profit margins come

We have already discussed it in the video

Now, in Return on investment

I already made a video on return on equity

And return on capital employed

If you didn't watch that videos

please watch them

In this video, we were going to talk about the Return on asset

What is a return on assets?

Asset = Equity + liability, we know this basic equation

If you see a typical balance sheet of a company

You see the assets on its left-hand side

I try to make a balance sheet, roughly made it

Here you see the assets and here are the liabilities and equity

Let's say the total assets of a company is of 4Cr

Let's assume the equity portion is 50% and the liability portion also is 50%

Let's say the equity portion is of 2Cr

And liability of this company also of 2Cr

As we talked earlier there is two type liability

One is the current liability,

Second is the non-current liability

Non-current liability is of more than years

Means you have to repay the money in more than one year

Or current liability is of less than one year

similarly, in assets, there are current and non-current assets

Money that comes in a less than year is a current asset

In which money come in

More than one year is your non-current assets

When we try to calculate return on assets

Which we call RoA in short

We try to see how good is any company, its assets here it is 4cr

How well is utilizing its assets

From this asset, as much profit, they will earn

So it Returns on assets improve

The return on assets of a company good, then better is the company as compared to other company

Let's try to understand the calculation of it

Here we talked balance sheet, I showed you in a short

But, Otherwise in balance sheet sheet

In asset, you see current and non-current assets

Or in liabilities, you see current and non-current liabilities

As we talked earlier in equity

You will see share capital reserves and surpluses

Or preferred equity if the company has

Broadly like this income statement will be seen to you

I removed the upper portions,

I come straight to the operating profits

So this PBIT is our operating profit

here I write OP

Or the profit after tax,

Final profit after paying interests and taxes Is our net profit

So here I write N.P

Here we need to calculate returns on asset

Asc we have talked about it we required a profit,

For dividing it with the total asset

To get the total returns

We know that the total value sheet gives us a total asset

But the question arises about the profit,

Whether it is operating profit, before tax or after-tax

a little bit of confusion may arise, the different analyst uses different formulas we will see later

When you calculate the returns on the equity as we have seen in the last video that

Profit after the tax is divided by total equity,

As we have talked about in the earlier video that after the operating profit

It is divided firstly after paying the interest

This means all the long and short term liability

Secondly, the tax to the govt.

thirdly, the returns of the shareholder of the equity,

We have talked profit after tax on return on equity because,

After paying interest and tax that profit is calculated in returns on equity

That is why we considered as profit after tax

When we talk about return on assets mostly you will come across this formula

Profit after tax divided by total asset

But you should not tale profit after tax ideally, but if you want there is no problem

If you are consistent in calculating the formula there is no problem,

But you should not consider interest expense because we consider profit after tax on equity returns

as we are talking about all the assets

We are including liabilities so we should not consider the interest portion

So ideally if you have PAT you will add interest expense

And with the interest, the tax on the interest will be deducted, that's why I have done 1-T

This one minus tax rate will be minus of the tax of the interest portion,

If we have the interest of 20lakh with the 20% of the tx on it

Then you need to deduct 6lakh from 20 because 305 of 20l is 6lakh which is to be deducted

The third formula, considering the operating profit rather than adding interest

PBIT is considered with the tax portion also

Based on the returns on asset is calculated according to me this both formulae is ideal for calculating ROA,

You can use either of them, but if you use this one

using either of the formulae you need to be consistent during companies comparing use the same formulas,

So quickly calculate with these 3 formulas,

In this case PAT is 42lakh

The total assets are 4cr. so we will divide it with 4k lakh

So the return on assets according to this formula is 10.5%

So according to this one, the PAT tax is 42lakh plus our interest expense was 20 lakh

Into one minus with a 30% interest rate which is 0.3

And dividing it with 4kk lakh to 4cr,

So with this way, the ROA will be 14%

in the last formula, we will divide PBIT with the asset the PBIT is 80 lakh divided with 400 lakh

Which will be 20%

So there is a difference in all the formulas giving different ROA

You should avoid this while comparing 2 companies using

PAT/total assets, while the other one is considered to be PBIT/total assets

It is much difference in both formulas

You the same formula

Let me show you the comparison of the companies,

This is the co. one as we considered, this is our PandL statement, which is also called income on the statement

This is the information of the balance sheet

Here is profit with equity, liability and total asset,

If we are considering it with company 2 its operating profit is let's say 2cr.

Means the co. seems to be large,

Let's see the increase in assets, according to that

Whether its asset turnover is good or not,

Let's say our interest expense is 30 lakh for one year

So after subtracting our profit before tax becomes 1Cr70lakhs

And a tax of 51lakhs is implied on this

So, profit after tax = 1Cr 19lakhs In this case

In the balance sheet, let's say, they have an equity cap of 3Cr 50lakhs

And liabilities (debt taken on this) is of 3Cr

I am not writing current & non-current liabilities separately

Total liabilities = 3Cr with the interest of 30lakhs

Total Assets = 6.5Cr

ROA in the first case for company 1

ROA(1) = PBIT/Assets

So in this case, ROA(1) = 80L/400L = 20%

In the second case, ROA(2) = 250L/650L = 30.8%

That means, the 2nd company is better than the 1st company in return on asset

Return on assets is good which means they are utilizing their assets to generate profits

They are generating more profits from fewer assets

Important points of Return on Assets

A company with better ROA is utilizing its assets better

But as I have said in my previous videos, we have to consider all the points & ratios

ROA can be increased by:

We have talked about, ROA = PBIT/Assets

One way is to increase the value of the numerator (PBIT)

The second way is to decrease the Assets

So, we can increase the PBIT by:

a. Better pricing, if the market is acceptable then we can increase the prices

Or we can find a USP in our product for better pricing

b. Economies of scale

If people won't pay a higher price for your product then you can go to the economies of scale, increase the volume

And if the price is decreasing then the volume will be high, which can increase the PBIT

c. lowering costs with better efficiency & productivity

The second way is to decrease assets

Assets = Current Assets + Non-Current Assets

So in current assets, accounts receivables is a big portion

Decrease the receivables of the loans you have given to the customers

Decrease your credit portion & collect your money ASAP which will decrease your accounts receivables

That will decrease your assets

b. Better inventory turnover

If you sell your inventory fast, then recovery will be fast, so there will be no inventory in books, which will decrease the assets

c. Higher assets utilization

If you use your assets fast & for a long time then your assets will decrease

You can take assets like machines, land, building on lease instead of buying them, which will decrease your assets

By doing so, your assets will decrease on books

e. Divesting lower margin businesses/assets

Then your assets can be decreased, by doing so you can increase your return on assets (ROA)

Increase your profit before interest tax & decrease your assets

How to check Return on Assets online & compare 2 companies of the same sector

We will compare the ROA of the 2 companies

These are the finances of Asian Paints from the money control website

You can search any company here

You can find the financials on the left-hand side

You can find total assets in the balance sheet & profit in profit & loss

Whether you want to calculate it with PBIT or profit after tax

But you don't have to calculate, the website automatically gives the ratios

When we go to the ratios section, then you can find the profitability ratios

We will see the ROA of Asian Paints

ROA = 14.79% in March 2018, we have seen the consolidated balance sheet

Now we will compare them with their competitor

We will see the consolidated balance sheet of Berger Paints

This is the consolidated balance sheet of Berger Paints

So, ROA = 11.68%

So, Asian Paints is better than Berger Paints in terms of ROA

That means, they are producing better profits on their assets than Berger Paints

That means they are utilizing their assets in a good way

We are talking based on ROA but we should compare all the ratios

As I have said in my previous videos, we have to compare all the ratios

Ratios like liquidity ratios, coverage ratio, valuation ratios

We will see all the ratios in are upcoming videos of this series

I hope you like the video, so do like & share

If you have any suggestions regarding this video or this channel then share them in the comment box

I try to read all of your comments & try to share all the topics through my videos

So you can suggest the topics in the comment box

I daily share interesting videos related to finance & investment

Subscribe & press the bell icon to get the notification of our latest video

See you in the next video, Till then keep learning, keep earning & stay happy as always