ABSTRACT
Return on net assets is a useful measure for internal management control purposes because it readily splits into a number of elements.
The first level of division is into two basic parts:
Return on Net Assets = Profit Margin x Net Asset Turnover
This means:
Profit Profit Sales = xNet Assets Sales Net Assets
‘Profit’ here is the ‘profit before interest payable and tax’ (PBIT). Using the figures for ABC Trading Limited, the breakdown is:
440 440 4000 = x
2 200 4 000 2 200
20.0% = 11.0% x 1.82
The 11.0 per cent profit margin on sales is a common measure of performance. The concept of ‘net asset turnover’ may be less familiar, but it is a useful way of thinking about the use of capital. The number ‘1.82’ can be thought of as the number of times that capital is being turned over in sales revenue in a period. Perhaps more concretely, it is the number of pounds’ worth of sales that each pound of investment generates on average in a year.
