RETURN ON TOTAL ASSETS (ROTA)
Return on total assets provides the foundation necessary for a company to deliver a good return on equity. A company without a good ROTA finds it almost impossible to generate a satisfactory ROE.
ROTA = PBIT x 100
PBIT is the amount remaining when total operating cost is deducted from total revenue, but before either interest or tax have been paid. Total operating cost direct factory cost, plus administration, selling and distribution overheads.
This operating profit figure is set against the total assets figure in the balance sheet. The percentage relationship between the two values gives the rate of return being earned by the total assets. Therefore this ratio measures how well management uses all the assets in the business to generate an operating surplus.
Return on total assets uses the three main operating variables of the business.
- Total revenue
- Total cost
- Assets employed
It is therefore the most comprehensive measure of total management performance.
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