The return on a bank's assets depends on... Concept and measurement of profitability of a financial asset. Deposits in rubles
Depends on two components: income and expenses.
Growth rates of income and expenses
Comparing the growth rates of these components allows us to assess which of them had a positive or negative impact on profits.
- turbojet engine— income growth rate;
- D 1— bank income in the reporting period;
- D 0— bank income in the previous period;
- TPP— rate of growth of expenses;
- P 1— bank expenses in the reporting period;
- P 0— bank expenses in the previous period.
Income elasticity coefficient
The income growth elasticity coefficient is calculated, defined as the ratio of the growth rate of income to the growth rate of bank expenses. If this coefficient is greater than one, then this indicates an economical use of funds, and, conversely, if it is less than one, then this is an uneconomical use of funds.
The value of the elasticity coefficient for interest income usually exceeds one, for non-interest income it is usually less than one.
Level of coverage of non-interest expenses with non-interest income
The level of coverage of non-interest expenses with non-interest income is important in banking practice:
- D n— non-interest income;
- R n- non-interest expenses.
The value of this indicator in foreign banking practice is set at 50, i.e. the level of non-interest income must be at least 50% of non-interest expenses.
Profit structure coefficients
It is necessary to identify the degree of impact of various active operations of the bank on the formation of its profit. For this purpose, profit structure coefficients are used:
- K1, K2, K3— profit structure coefficients;
- Dchko— net income from credit operations;
- D black and white— net income from transactions with securities;
- D chpo— net income from other operations;
- P- profit.
By calculating these coefficients, those operations of a commercial bank are identified that bring it the largest share of profit.
Profitability and profitability indicators
The main performance indicators of a bank are traditionally considered to be indicators of profitability, profitability (profitability).
The profitability of various banking operations is determined through indicators:
- net interest margin;
- operating margin.
Net interest margin
Net interest margin calculated by the formula
- NIM— net interest margin;
- D p— interest income for the period;
- R p— interest expenses for the period;
- A d- income-generating assets.
Operating margin
Operating margin— profitability of the bank’s main operations. It is calculated by the formula
- D chosn— net income from core banking operations;
- A d- income-generating assets.
Net income from core banking operations is calculated by summing:
- net interest income;
- net income from foreign exchange transactions;
- net income from transactions with securities;
- net income from leasing operations;
- net income from transactions with precious metals.
Profitability of other operations calculated by the formula
- D chpo- net income from other operations;
- A d- income-generating assets.
Net income from other operations is the sale (disposal) of property, write-off of receivables, payables, rental of property, and other operations.
The profitability of commission transactions is calculated using the formula
- D k— profitability of commission transactions;
- D chk— net commission income;
- A d- income-generating assets.
Profit Spread
The traditional indicator of bank profitability is profit spread:
- D p— interest income;
- R p— interest expenses;
- A d— income-generating assets;
- P in- bank liabilities on which interest is paid.
Using the spread, it is assessed how successfully the bank performs the function of an intermediary between depositors and borrowers and
How intense is the competition in the banking market? Increased competition usually results in a narrowing of the difference between average income on assets and average expenses on liabilities. In this case, provided all other factors remain constant, the bank's spread is reduced, which forces the bank to look for other ways to make a profit.
This indicator is also valuable in that it highlights the impact of interest rates on the financial results of a bank’s activities, thereby allowing a better understanding of the degree of vulnerability of the bank’s revenue operations. Comparing this indicator with that of a group of related banks, as well as with the average calculated for Russia or the region, will allow us to assess the effectiveness of the bank’s interest rate policy.
Comparison of profitability indicators allows us to identify the most effective bank operations and, taking into account the ROA indicator, also determine operations that influence changes in the financial result. It is important to keep in mind that:
- the operating margin indicator indicates the place in the bank’s active operations of traditional banking operations (loan operations, operations with securities and operations with foreign currency);
- a significant excess of the return on assets indicator over the net interest margin indicator characterizes the bank’s ability to receive interest income and indicates a high share of assets not related to interest income in the bank’s assets, or the presence of a significant share of commission income in the bank’s income.
Therefore, it is necessary to consider the profitability of commission transactions. The low value of this indicator indicates insufficient attention of the bank to the development of new banking services, which is one of the reserves for increasing the profitability of the bank.
Comparison of profitability indicators over a number of reporting dates and their comparison with the average values for the corresponding group of banks allows us to determine trends in the growth (decrease) of profit, determine the factors that had the greatest impact on its change, draw a conclusion about the financial stability of the bank and determine reserves for increasing operational efficiency jar.
Bank profitability
The profitability (profitability) of a commercial bank is usually defined as the ratio of book profit to total income:
- P total— bank profitability;
- P- profit;
- D - bank income.
The overall level of profitability allows us to evaluate the overall profitability of the bank, as well as the profit per 1 ruble. income (share of profit in income). This is the main indicator that determines the efficiency of banking activities.
Profit per bank employee is a mechanism for collectively assessing the profitability of all bank personnel:
- P h— net profit of the bank;
- OCP - total number of personnel.
The level of profitability of a commercial bank is assessed using financial ratios. The system of profitability ratios includes the following main indicators:
- ratio of profit and equity;
- ratio of profit to assets;
- profit to income ratio.
The methodology for calculating these indicators depends on the accounting and reporting system adopted in the country.
The numerator of these financial ratios always contains the estimated financial result of the bank’s activities as of the reporting date. Under the current accounting and reporting system in Russia, the numerator is balance sheet profit; under foreign accounting standards, it is net profit.
Return on Capital
World practice shows that the determining indicator of the efficiency of bank capital is maximizing the value of share capital while maintaining an acceptable level of risk. Along with the market price of bank shares, an important indicator for assessing the bank’s activities is the ratio of net profit to share capital (ROE in foreign practice). This indicator characterizes how effectively the owners’ funds were used during the year, i.e. it is a measure of profitability for bank shareholders. It establishes the approximate amount of net profit received by shareholders from investing their capital.
In domestic practice, return on capital is calculated using the formula:
- PC— profitability of capital;
- P B— balance sheet profit for the period;
- SK— the amount of equity capital in the period.
The return on capital indicator characterizes the ability of equity capital to generate profit and allows one to assess the possibility of ensuring real growth of equity capital in an amount adequate to the growth of business activity.
It is recommended to compare the resulting value of profitability of capital with indicators of capital adequacy (an increase in the first indicator while a decrease in the value of the second indicates an expansion of the range of risky operations).
Profitability of assets
Return on assets (ROA) is one of the main coefficients that allows us to quantify the bank’s profitability.
- ROA - return on assets;
- P B - balance sheet profit;
- A is the total balance sheet asset for the period.
Profitability of assets characterizes the ability of a bank's assets to generate profit and indirectly reflects their quality, as well as the efficiency of the bank's management of its assets and liabilities.
A low ratio may be the result of conservative credit policies or excessive operating expenses; a high value of the indicator indicates successful management of assets.
This indicator can be modified:
A d- income-generating assets.
The difference between these two indicators indicates the bank's ability to increase its profitability by reducing the number of non-income-generating assets.
In foreign practice, the numerator of these indicators is net profit.
It should be noted that in these conditions, the growth rate of profitability of assets and capital should be higher than the average inflation rate.
When managing profitability, the values of profitability of assets and capital must be compared with the average value for the corresponding group of banks.
Indicators of profitability of assets and profitability of capital are fundamental in the system of financial profitability ratios of a bank. However, high profits are usually associated with great risk, so it is necessary to simultaneously take into account the degree of risk protection of the bank.
What are the assets of an enterprise, we told in. How to evaluate the efficiency of asset use? We'll tell you in this article.
Return on assets indicators
Return on assets shows how effectively an organization uses its assets. Since the main goal of an organization is to generate profit, it is profit indicators that are used to assess the efficiency of asset use. Return on assets characterizes the amount of profit in rubles that brings 1 ruble of the organization's assets, i.e. return on assets is equal to the ratio of profit to assets.
Naturally, a decrease in return on assets indicates a drop in operating efficiency and should be considered as an indicator signaling that the work of the company's management is not productive enough. Accordingly, an increase in return on assets is considered a positive trend.
For the purpose of calculating return on assets, net profit is often used. In this case, the return on assets ratio (K RA, ROA) will be determined by the formula:
K RA = P H / A S,where P P is net profit for the period;
A C is the average value of assets for the period.
For example, the average value of assets for the year is the sum of assets at the beginning and end of the year divided in half.
By multiplying the KRA ratio by 100%, we obtain the return on assets ratio as a percentage.
If instead of net profit you use the profit before tax indicator (P DN), you can calculate the return on total assets (P SA, ROTA):
R SA = P DN / A S.And if in the above formula, instead of the total value of assets, we use the net asset indicator (NA), we can calculate not the total return on assets, but the return on net assets (R NA, RONA):
R CHA = P DN / CHA.Of course, profitability is calculated not only on assets. If we relate profit to assets, we calculate return on assets, return on sales is calculated as the ratio of profit to revenue. At the same time, in addition to the profitability of assets, the efficiency of their use also speaks.
Return on assets ratio: balance sheet formula
When calculating return on assets ratios, accounting or financial reporting data are used. Thus, according to the balance sheet (BB) and the financial results statement (OFR), the return on assets ratio will be calculated as follows (Order of the Ministry of Finance dated July 2, 2010 No. 66n):
K RA = line 2400 OP OFR / (line 1600 NP BB + line 1600 KP BB) / 2,where line 2400 OP OFR is net profit for the reporting period, reflected in line 2400 of the financial results report;
line 1600 NP BB - the amount of assets at the beginning of the period, reflected on line 1600 of the balance sheet;
line 1600 KP BB - the amount of assets at the end of the period, reflected on line 1600 of the balance sheet.
Definition
Return on assets (returnonassets, ROA) - a financial ratio characterizing the return on the use of all assets of the organization. The ratio shows the organization's ability to generate profit without taking into account the structure of its capital (financial leverage), and the quality of asset management. Unlike the “equity capital” indicator, this indicator takes into account all the assets of the organization, and not just its own funds. Therefore, it is less interesting for investors.
Calculation (formula)
Return on assets is calculated by dividing net profit (usually for the year) by the value of all assets (i.e. the balance sheet of the organization):
Return on Assets = Net Profit / Assets
The result of the calculation is the amount of net profit from each ruble invested in the organization’s assets. Often, in order to get a more visual percentage, the formula uses multiplication by 100. In this case, the indicator can also be interpreted as “how many kopecks each ruble invested in the organization’s assets brings.”
For more accurate calculations, the “Assets” indicator is taken not as the value for a specific date, but as the arithmetic average - assets at the beginning of the year plus assets at the end of the year divided by 2.
The organization's net profit is taken according to the "Profit and Loss Statement", assets - according to the Balance Sheet.
If the calculation is made not for a year, but for another period, then to obtain a result comparable to an annual one, a formula is used (in particular, in the “Your Financial Analyst” program):
Return on assets = Revenue*(365/Number of days in the period)/((Assets at the beginning + Assets at the end)/2)
Normal value
Return on assets is highly dependent on the industry in which the company operates. For capital-intensive industries (such as railway transport or electricity) this figure will be lower. For service companies that do not require large capital investments and investments in working capital, the return on assets will be higher.
In the financial and economic analysis of an enterprise, there are two main groups - absolute and relative indicators. Absolute indicators include revenue, sales volume and profit. Analysis of these indicators does not allow a comprehensive assessment of the economic activity of the enterprise.
For a more complete picture, relative indicators are used - financial stability, liquidity and profitability ratios. Relative measures are also more useful when comparing multiple organizations.
What is return on assets of an enterprise and what does it show?
Return on assets (ROA – returnonassets) is an indicator that reflects the efficiency of using assets. There are 3 types of return on assets:
- return on non-current assets (ROA ext);
- return on current assets (ROA);
- return on assets (ROA).
Non-current assets (NCAs)- this is the property of the enterprise, reflected in the first section of the balance sheet for medium-sized enterprises and in lines 1150 and 1170 for small enterprises. Non-current assets are used for more than 12 months, do not lose their technical properties during operation and transfer their value in parts to the cost of manufactured products (services provided, work performed).
Non-current assets include:
- fixed assets (buildings, structures, equipment, tools, inventory, power lines, transport, etc.);
- intangible assets (rights, patents, licenses, trademarks, business reputation, etc.);
- long-term financial investments (investments in other organizations, long-term loans (more than 12 months), etc.).
- other.
Non-current assets can be divided into 3 groups:
- material: fixed assets,
- intangible: intangible assets,
- financial: financial investments.
Current assets (OBA)- this is the property of the enterprise, reflected in the first section of the balance sheet for medium-sized enterprises and in lines 1210, 1230 and 1250. Current assets are used for less than 12 months or one production cycle (if it lasts more than one year), immediately transfer their value to cost manufactured products (services provided, work performed).
Current assets include:
- working capital in inventories and work in progress;
- according to acquired values;
- accounts receivable;
- short-term financial investments;
- cash and cash equivalents.
Current assets can be divided into 3 groups:
- material: stocks,
- intangible: accounts receivable, cash and cash equivalents,
- financial: value added tax (VAT) on acquired assets, short-term financial investments (except for cash equivalents).
The total amount of assets of an enterprise can be found by adding the values of non-current and current assets.
Return on assets calculation formula
In general, the formula for calculating return on assets is as follows:
ROA=(PR/A avg)*100%
ROA=(NP/A avg)*100%
Return on assets shows how many kopecks of profit from sales or net profit will be brought by one ruble invested in the assets of the enterprise. Return on assets also reflects the ability of assets to generate profit.
The amount of profit from sales can be found in the income statement (profit and loss) or calculated using the following formula:
where TR (totalrevenue) is the company’s revenue in value terms, TC (totalcost) is the total cost. Revenue (TR) can be found by multiplying sales volume (Q - quantity) by price (P - price): TR=P*Q.
The total cost (TC) can be found by adding up all the costs of the enterprise: materials, components, wages of workers and administrative and management personnel, depreciation charges, utility costs, safety and security, general shop and plant expenses, etc.
The amount of net profit can be found in the income statement (profit and loss) or calculated using the following formula:
PE=TR-TC-Pr+PrD-N,
where PrR – other expenses, PrD – other income, N – amount of accrued taxes. Other income and expenses include, respectively, receipts or expenses not related to the main activities of the organization, among them - exchange rate differences, the amount of revaluation/depreciation of assets.
The amount of assets must be taken from the balance sheet.
Formula for calculating the balance sheet of an organization
Balance sheet – form No. 1 of the enterprise’s financial statements. The balance sheet reflects the values of items at the beginning of the current (end of the previous) and the end of the current period. To calculate return on assets, it is necessary to find the arithmetic average of the values of each article/section.
For medium-sized enterprises, it is necessary to calculate the arithmetic average first from the values of line 190 (Total for section I) - you get the average annual value of non-current assets (VnA avg), and then from the values of line 290 (Total for section II) - you get the average annual value of current assets (AvA avg ).
For small enterprises, it is necessary to calculate the arithmetic average first from the values of lines 1150 (Tangible non-current assets) and 1170 (Intangible, financial and other non-current assets) - you will get the average annual value of non-current assets (INA avg).
Then, from the values of lines 1210 (Inventories), 1250 (Cash and cash equivalents) and 1230 (Financial and other current assets) - you get the average annual value of current assets (Avg).
VnA sr = VnA np + VnA kp,
where VnA np is the value of non-current assets at the beginning of the current (end of the previous) period, VnA kp is the value of non-current assets at the end of the current period.
ObA av = ObA np + ObA kp,
where ObA np is the value of non-current assets at the beginning of the current (end of the previous) period, ObA kp is the value of non-current assets at the end of the current period.
A avg = BnA avg + Both avg.
for non-current assets – ROA ext = PR/InA avg;
for current assets – ROA ext = PR/OBA avg
Standard values
Standard values for return on assets vary depending on the specifics of the enterprise's activities. The table shows the standards for the main types of economic activities.
Obviously, a trading organization will have the highest return on assets compared to other types of activities, since this organization has a low value of non-current assets.
A production organization, having a large amount of non-current assets due to equipment, will have average profitability. The financial organization operates in a highly competitive environment, and therefore is relatively low.
In general, the return on assets indicator is important for analyzing the financial and economic activities of an enterprise and comparing it with other organizations. Return on assets shows the efficiency of using non-current and current assets.
The return on assets ratio shows how well the company's assets are used and how effectively management manages them. Information for calculations is taken from the financial statements of the enterprise - f. No. 1 and No. 2. In order to determine ROA, it is enough to divide the net profit (Article 2400, Statement of Financial Results) by the average value of the enterprise's assets (Article 1600, Balance Sheet). The standard indicator is PA>0, since otherwise the company suffers losses.
When assessing the efficiency of an enterprise, it is worth paying attention to how effectively the property owned by the company is used - its fixed assets, inventory, money in the account. For this purpose, an indicator cleared of the influence of borrowed funds is used.
Return on assets(Return on Assets - ROA, RA) is a financial ratio that allows you to determine the amount of a company's net profit for each unit of property it owns. It is calculated as the ratio of the net financial result to the value of the company's assets.
Reference! In contrast to the return on sales ratio, RA is calculated by dividing profit by the average value of the enterprise's assets: taking into account the price of property at the beginning and end of the year.
ROA can be thought of as an extension of the return on equity ratio: while it measures owners how much profit each piece of their investment generated, return on assets measures how much they earned on each piece of property acquired through their investment.
Reference! Since the PA indicator characterizes the efficiency of use of the enterprise’s property, it also characterizes the quality of management at the enterprise. This is often called the “rate of return.”
ROA shows the return in the form of net profit from the company's assets (cash, inventory, fixed capital, accounts receivable, intangible assets, etc.) and determines the company's ability to generate profit, regardless of the amount of borrowed funds in the capital structure.
Formula for calculating the indicator
Information to determine the profitability of property must be taken from the financial statements of the enterprise: balance sheet (Form No. 1) and financial performance report (Form No. 2). These reports contain values:
- net profit (Article 2400 F. No. 2);
- current (Article 1200 F. No. 1) and non-current assets (Article 1100 F. No. 1).
Important point! To obtain the exact value of the ratio, the values of current and non-current assets are considered at the beginning and end of the year.
RA = PE / ((OAng + OAkg)/2)+((VAng+VAkg)/ 2), where
- PE is the company's net profit or loss.
- JSC ng, kg - current assets at the beginning and end of the year.
- VA ng, kg - non-current assets at the beginning and end of the year.
The above formula for calculating the ROA coefficient can be presented taking into account the relevant items of the financial statements:
RA = st. 2400 / ((st. 1100 ng + st. 1100 kg)/2 + (st. 1200 ng + st. 1200 kg) / 2)
RA = st. 2400 / (st. 1600 ng + st. 1600 kg)/2
The calculation procedure and a simplified example of determining the ROA value are presented in the video
Normal value of efficiency of use of company assets
The requirements for the normal PA value are similar to the requirements for other indicators from the “Profitability” group: it must be greater than zero. If the resulting value turns out to be negative, then the company is operating at a loss.
Reference! ROA is a relative indicator: it should not be considered as a single value - the analysis is carried out by comparison over the years, with a reference value or with similar ratios of competing firms.
For trading companies and service sector enterprises, the coefficient will always be high due to the small property base; on the contrary, for capital-intensive industries (metallurgy, electric power, mechanical engineering, etc.) it will be lower.
Reference! The return on assets indicator, like other similar ratios, is measured as a percentage.
Examples of calculating the profitability ratio
Practical examples will help you understand the sequence of steps and the algorithm for calculating the return on assets ratio. Two Russian companies were used as objects of assessment - the capital-intensive Russian corporation PJSC Avtovaz and the trading company M.Video.
Conclusion! The return on assets ratio for PJSC Avtovaz decreased in 2016 due to a decrease in net profit. In 2017, the figure increased, but did not return to its original level. This state of affairs requires a revision of the corporation's profit generation policy.
Conclusion! Property profitability indicator for PJSC M.Video in 2015-2016. remains at a stable level. In 2017, there was growth due to an increase in net profit by 21.5%. The corporation has a favorable financial position and a sound asset and profit management policy.
If we consider both enterprises, the capital-intensive PJSC Avtovaz demonstrates a lower Return on Assets value. Its fixed assets have a high cost, which is why for each unit of them there is a smaller amount of profit. As for the M.Video trading corporation, its property is represented mainly by inventory, which allows it to achieve a higher return on assets.
The most convenient way to calculate the RA indicator is in the Excel spreadsheet editor. The attached document details the calculations presented above.
