It is common for companies to not only look at how profitable they are as an entire organization, but to study certain elements of business activity to see how profitable those elements are.
A variety of profitability ratios are known in financial analysis. Profitability ratios measure the operating success of a company for a given period or point in time.
One of the most widely used element, which is extremely essential for web hosting companies is Assets. If you wish to see how profitable (if at all) your assets are and if they are being used effectively, use the following formula:
Return on Assets = Profits after taxes / Total Assets
The return on assets ratio (presented as "%") indicated the amount of earnings generated by each dollar invested in assets. Thus, the higher the return on assets, the more profitable the enterprise.
Now, imagine you found your company's return on assets ratio, which is 6.30%.
What possible use can you gain from it? Well, you can either compare this data against your competition or industry averages. In order to demonstrate the use of return on assets ratio, consider the following examples.
Example #1: Imagine a fictional company named Web Hosting Company. From Web Hosting Company's Income Statement for the year 2002 we can find:
Profits after taxes (a.k.a. Net Earnings): $23,500
Total Assets: $275,000
% Return on Assets = $23,500 / $275,000 = 8.55%
The ratio tells us that Web Hosting Company generated 8.55 cents on every dollar invested in assets (servers, office, other equipment, etc).
Example #2: Now let's choose Interland, a market rival and a publicly trading company. From Interland's Income Statement for the year 2002 we can find:
Profits after taxes (a.k.a. Net Earnings): -$145,720,000 (Net Loss)
Total Assets: $395,280,000
% Return on Assets = -$145,720,000/ $395,280,000 = -36.9%
The ratio tells us that Interland lost almost 37 cents on every dollar invested in assets (servers, office, other equipment, etc).
Keep in mind that Interland is a publicly trading company, and economic recession, coming from slowdown in business activity, is one of the biggest reasons to explain such poor data. As economic conditions become more appealing, Interland's return on assets ratio will demonstrate rapid improvement not common to smaller/private companies.
Conclusions.
From the two examples we learnt the ratios of:
Web Hosting Company (8.55%)
Interland (-36.9%).
Your company's ratio was fictionally set to 6.30%.
Industry average for 2002 was 4.26%.
We can make the following conclusion: While your company's return on assets ratio exceeded that of the average firm in the industry, your venture's profitability appears strong. Our fictional Web Hosting Company has an even higher profitability which comes from a more efficient use of their assets. Interland, in comparison to your company, Web Hosting Company and the industry average, is losing money.
Your company is clearly outperforming the industry. But a good manager will not stop here. The next step for him will be to look closer at competitors whose return on assets ratio is higher than yours. Analyze the company's operation's methods and imitate or introduce similar strategies to gain an even stronger position within the industry.
*********************************
You are welcome to leave your comments, suggestions, ideas either privately through PM or e-mail or by posting below.
Best,
A variety of profitability ratios are known in financial analysis. Profitability ratios measure the operating success of a company for a given period or point in time.
One of the most widely used element, which is extremely essential for web hosting companies is Assets. If you wish to see how profitable (if at all) your assets are and if they are being used effectively, use the following formula:
Return on Assets = Profits after taxes / Total Assets
The return on assets ratio (presented as "%") indicated the amount of earnings generated by each dollar invested in assets. Thus, the higher the return on assets, the more profitable the enterprise.
Now, imagine you found your company's return on assets ratio, which is 6.30%.
What possible use can you gain from it? Well, you can either compare this data against your competition or industry averages. In order to demonstrate the use of return on assets ratio, consider the following examples.
Example #1: Imagine a fictional company named Web Hosting Company. From Web Hosting Company's Income Statement for the year 2002 we can find:
Profits after taxes (a.k.a. Net Earnings): $23,500
Total Assets: $275,000
% Return on Assets = $23,500 / $275,000 = 8.55%
The ratio tells us that Web Hosting Company generated 8.55 cents on every dollar invested in assets (servers, office, other equipment, etc).
Example #2: Now let's choose Interland, a market rival and a publicly trading company. From Interland's Income Statement for the year 2002 we can find:
Profits after taxes (a.k.a. Net Earnings): -$145,720,000 (Net Loss)
Total Assets: $395,280,000
% Return on Assets = -$145,720,000/ $395,280,000 = -36.9%
The ratio tells us that Interland lost almost 37 cents on every dollar invested in assets (servers, office, other equipment, etc).
Keep in mind that Interland is a publicly trading company, and economic recession, coming from slowdown in business activity, is one of the biggest reasons to explain such poor data. As economic conditions become more appealing, Interland's return on assets ratio will demonstrate rapid improvement not common to smaller/private companies.
Conclusions.
From the two examples we learnt the ratios of:
Web Hosting Company (8.55%)
Interland (-36.9%).
Your company's ratio was fictionally set to 6.30%.
Industry average for 2002 was 4.26%.
We can make the following conclusion: While your company's return on assets ratio exceeded that of the average firm in the industry, your venture's profitability appears strong. Our fictional Web Hosting Company has an even higher profitability which comes from a more efficient use of their assets. Interland, in comparison to your company, Web Hosting Company and the industry average, is losing money.
Your company is clearly outperforming the industry. But a good manager will not stop here. The next step for him will be to look closer at competitors whose return on assets ratio is higher than yours. Analyze the company's operation's methods and imitate or introduce similar strategies to gain an even stronger position within the industry.
*********************************
You are welcome to leave your comments, suggestions, ideas either privately through PM or e-mail or by posting below.
Best,
