Booster your BIz

has several different assets that at year-end add up to $26 million. One of its assets is inventories, which are products being held by the business for sale to customers. These products havent been sold yet, so the cost of the products is held in the asset account and will not be charged to expense until the products are sold. The cost of its inventories at year-end is $7.2 million. Of this amount, $2.4 million hadnt been paid for by the end of the year. The business has an excellent credit rating. Its suppliers give the business a month to pay for purchases from them. Continue reading…

The business used $26 million total assets to earn $3.9 million before interest and income tax, or EBIT. Dividing EBIT by total assets gives the rate of return on assets (ROA) earned by the business. In the example, the business earned a 15.0 percent ROA for the year ($3.9 million EBIT $26 million total assets = 15.0%). Is this ROA merely adequate, fairly good, or very good? Well, relative to what benchmark or point of reference? The business has borrowed money for part of the total $26
million total capital invested in its assets. The average annual interest rate on its debt is 8.0 percent. Continue reading…