Financial Ratio Analysis - Return on Total Assets Ratio

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Return on Total Assets Ratio

The Return on Total Assets Ratio (ROTA) has a similar meaning to ROCE and the method of calculating it is the same, too.

Let's work on ROTA with the Carphone Warehouse's figures:

Return on Total Assets (ROTA)	=	PBIT	* 100
		Total Assets

Notice that we use a different profit figure for this ratio - we use profit before interest and tax this time. This is because we try to match the profit we use with the total assets that operating managers use. Accountants would say that interest payments and tax payments are separate from the ways in which the total assets are used. That is, if we are trying to measure the efficiency of our total assets, then take the profit that they have generated before interest and taxation.

Interest and tax problems are the senior managers' concern, since they decide how much to borrow and therefore how much interest they ought to pay; senior managers decide on capital investment, too, and they have a big say in how much tax they pay for a year. Therefore, since operating managers can't control the amounts of interest and taxation paid, they should not be assessed against it.

The Carphone Warehouse	31 March 2001	25 March 2000
	£'000	£'000
Profit before interest and taxation	45,012	25,300
Total Fixed Assets	396,175	100,279
Total Current Assets	315,528	171,160

Off you go ... fill in the blanks in this table:

ROTA For the Carphone Warehouse
31 March 2001	Profit before Interest and Tax Total Assets	______________	= _____%
25 March 2000	Profit before Interest and Tax Total Assets	______________	= _____%

Did you get this?

What do we think about those results? Well, we can see a significant difference between ROCE and ROTA between the two years: the ROTA values are much more in line with each other. This is because we are now looking at profit before interest and tax and total assets - total assets increased by about three and a half times and profits almost doubled. AND, the amount of interest payments has increased by £2,581,000 in 2001 and that has made a big difference to this return.

We can see perfectly with this example how we need to take out the impact of interest and tax if we want to understand how well the operational managers have done with their assets.

Take a look at other businesses in the database to see how they have done with their ROTA and to see how interest and taxation has had an impact on their results.

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