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Return on Total Asset ratio (Formula, Examples) | Calculation - YouTube
Channel: WallStreetMojo
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hello everyone welcome to the channel of
Wallstreetmojo friends today we are
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going to learn an important ratio that's
called return on total assets return on
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total assets over here as you can see in
the graph of General Motors is close
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to 5.21% and
it is greater than that of Ford which is
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close enough to 3.4.40% for financial a 2016
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so what does this return on asset really
means a i mean return on asset or return
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on total assets it relates to the forms
earning to all the capital invested in
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the business so in this particular
too-tall we'll discuss return on total
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asset in detail now what is return on
total assets trying to understand how
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much revenue one form would earn by
employing its asset is not good measure
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so there should be something that is
more refined and the refinement has been
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done in return on total assets ratio so
when we calculate the asset turnover
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ratio we take into account the net sales
or the net revenue however the revenue
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always is not a good predictor of
success there are many organizations
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which earn good revenue but when we
compare the revenue with the expenses
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they need to bear there would hardly be
any profit so comparing net revenue with
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the total assets wouldn't solve the
issue of the investors that wants to
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invest in the company take an example of
a box
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8 box Inc and let us have a look at
the asset turnover ratio the asset turnover
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doesn't tell us much about the
performance of the box in this in the in
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the amount chart the box inks utilization
of the data is 0.611 however then
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when we look at the return on the total
assets of boxing we noted that it has
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been negative all the way if you see
this it has been completely negative
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negative I mean this implies that the
company is unable to generate returns
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with respect to its deployed capital so
let's learn the return on total assets
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formula let's have a look at the formula
of return on total assets
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will go to the excel sheet and will
learn the formula
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so will write a return on total assets
formula that is is equal to saying will
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write the earning before interest and
tax divided by the average total assets
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so earning before interest and that over
here will just put line low voltage and
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as you can see their formula is ready
now many companies take a vitamin c
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there are diverse opinions on what to
take into numerator of the roof of this
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ratio some prefer to take net income as
the numerator and the other like to put
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a bit where they don't want to take into
account the interest in taxes so my
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personal advises that you should
consider a bit as this term is before
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interest in taxes I mean breeded and pre
equity likewise when we comparing it
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with the denominator that is the total
assets we are comparing the we are
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taking care of both the equity as well
as the debt holders so net income
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divided by the total assets may be an a
very income incorrect comparison
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primarily due to its numerator and the
net income is the return attributed to
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the equity holders and the denominator
that is the total asset considers both
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equity and debt this means that we are
comparing apples to oranges so let's
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talk about the average total assets I
mean what will you take into account
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well computing of figure of average
total assets will include everything
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that is capable to yield value for the
owner and for more than one year that
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means will include all the fixed assets
at the same time will also include
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assets which can be easily be converted
into cash that means we would be able to
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take current assets under t total assets
and will also include intangible assets
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that have value but they are not
physical in nature like goodwill so will
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not take Fluke disease assets like
promotional expenses of the business or
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discount allowed and he shows shares a
loss incurred on the issue of debentures
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etc into account then we would take him
to figure of the beginning of the year
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and at the end of the year and would
find out the average total figure so
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let's see make an interpretation of the
return on total has see the reason we took
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a bit that is earning before interest
and tax which is known as the operating
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income of the company for calculating
the return on total assets is because
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this would give a very holistic picture
of the company and thus the
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interpretation
the ratio would be much more holistic
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let's see the investors find out that
the return total assets for the company
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is more than 20% for the last
5 years do you think it's a good
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measure to invest into the company for
future benefits the answer is of course
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yes it's far better to invest into a
stable company that a company which
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produces volatile profits over the years
in simple terms we can see that
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increasing the return of total assets
means better users either
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a better use of the assets to generate
returns for the form and decrease in the
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return of total asset means the form has
a room for improvement maybe the form
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needs to reduce the expenses or
reproduce you old assets that are eating
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out the profits of the company
no let's evaluate this particular ratio
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with the help of an example
let's go to the next sheet and let's
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evaluate the example over here the
operating profit that is the earning
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before interest and taxes is given then
we have the details related to taxes
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assets at the beginning of the year and
assets at the end of the year so let's
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do the calculation to find out the
return on total assets for both the
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companies first we we have been given
the operating profit and taxes so we
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need to calculate the net income for
both the companies now as we have the
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assets at the beginning of the year and
at the end of the year we need to find
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out the average asset for both the
companies so let's start doing a
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calculation you can see the assets at
the beginning of the year will say this
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as A and asked at the end of the year as
B okay now our average assets our
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average assets is going to be A + B
divided by 2 and before that will make
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the total assets total assets so that is
going to be A + B let's quickly do
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that assets at the beginning of the year
and assets at the end of the year and
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you can press ctrl R now the average
assets is going to be the total assets
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okay
the total assets divided by 2 and you
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have your average assets so now let's
calculate the return on total assets for
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both the companies as you can see we are
we are available with the data of
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a bit we have the average assets so we
can calculate the return on total assets
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so that is is equal to will say the
earning before interest tax divided by
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the average assets so will have the
ratio return on total assets that is
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0.71 and 0.53
so for company A the return on total
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assets is 71% and 71% is a very great
indicator of success and if the company
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A has been generating profits in the in
this range of 40 to 50 percent then
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investors may easily put their money
into the company however before
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investing anything the investor should
cross-check the figures with their
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annual report and see whether this is an
exception or any special point as
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mentioned or known for Company B also
the return on total assets it's quite
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good that as 53% I mean usually the
Uniform achieves at only personal bar in
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the computation of return or total asset
it is considered healthy and more than
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40% means the form is doing really quite
good now let's evaluate return on total
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assets of Colgate see now let's understand
the ratio from a practical standpoint
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and below is the very snapshot of a
Colgate's
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balance sheet as you can see the data
the total assets is given over here of
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this is this is the data of Colgate and
below is the snapshot over here you can
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see colgate its income statement please
don't note that we need to use a bit for
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the return on total asset calculation if
we calculate the read on total assets of
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the Colgate the Colgate's return on
total asset has been declining since
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2010 and most recently it has declined
to its lowest by 21.9%
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as you can see over here from December
20 2008 to 2009 2010 11 and so on and so
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forth so there is a continuous drop in
the ratio as you can see so primary
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there can be only 2 reasons that
contribute to the decrease either the
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denominator that as the average assets
has increased significantly or the
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numerator that has net-net cells have
dropped significantly see in Colgate we
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note that the total assets have
decreased in in 2015 the decrease in the
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total assets should ideally lead to
increase in return on total assets the
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ratio this leaves us to look at the net
sales figure and this leaves us to look
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at the net sales figure from the
management discussion and analysis
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section of the Colgate we note that the
overall net sales decrease by as much as
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7% in 2015 this decrease in
the sales by 7%
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led to decrease in the return of total
assets so
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the primary reason for the decrease in the
sales was the negative impact due to the
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foreign exchange of 11.5% organic sales
of Colgate however increased by 5% 2015
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now let's evaluate the return on total
assets of buying in this particular
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section will look at the few banks and
the return or total assets ratio so that
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we can conclude how good they are they
are doing in terms of generating profit
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from the above graph we can now compare
the return on the total assets of the
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top global banks the highest return on
the total asset has been generated by as
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you can see Wells Fargo
Wells Fargo has generated the highest as
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1.32% and lower certain on the
total asset has been generated by
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Mitsubishi close enough 2.27% so all of the banks are done on
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the total assets are between 0.3 percent
and 1.3 percent so to understand methods
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banks stand in terms of the comparison
we can take an average and compare each
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banks performance but we have taken each
man's return on total assets and average
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return on total assets which is close
enough to in the neighborhood of 0.9
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zero percent that means many banks which
are performing over 0.90%
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0.90 is yeah I mean
they're doing really good so on the very
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final note let's evaluate the
limitations on the return on total
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assets if we take into account the net
income to calculate the ratio then the
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picture wouldn't be holistic as it
includes taxes and interest if any but
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in case of a bit in number we don't
need to worry about that for industries
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which our asset intensive won't generate
that much income compared to the
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industries which are not asset intensive
for example if you take and talked on
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any auto industry to produce auto and as
a result of that profit the industry
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first needs to invest a lord into the
assets those in case of the auto
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industry the return on asset won't be
that higher however in case of the
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service companies where the investments
in the asset is minimal
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then the return of assets will be pretty
high so in the final analysis as an
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investor you should definitely find out
return on total assets before investing
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in your company
but along with that you should also
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consider other metrics like return on
equity return on invested capital
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current ratio quick ratio Dupin analysis
and so on and so forth
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thank you everyone
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