INVESTMENT

How To Increase Return on Asset

Azwimar Putranusa | YP 52B | 29114335

Introduction
Return on assets (ROA) is a financial ratio that shows the percentage of
profit a company earns in relation to its overall resources. It is commonly defined
as net income divided by total assets. Net income is derived from the income
statement of the company and is the profit after taxes. The assets are read from
the balance sheet and include cash and cash-equivalent items such as
receivables, inventories, land, capital equipment as depreciated, and the value of
intellectual property such as patents. Companies that have been acquired may
also have a category called "goodwill" representing the extra money paid for the
company over and above its actual book value at the time of acquisition.
The only reason your business owns assets is to produce income. You
measure your income in relation to your assets. This is called return on assets, or
ROA. Assets like equipment directly produce products that create income,
whereas buildings contribute indirectly to income, because they house incomeproducing equipment. You must constantly find ways to reduce asset costs and
increase income to keep your ROA as high as possible.

ROA=

Net Income After Tax

Total Assets

Analysis
We look at the ROA formula, if the companies want to increase ROA, we have to
increase the net income after tax (numerator) and decrease the total asset (denominator). To
increase the numerator, what we can do is:
1. Increasing the sales
We can produce more to increase the sales, but the problem is how we can increase
the production without adding new machine? Absolutely, we can. We can lease our
machine and/or all our fixed asset. Therefore, the total asset can rapidly decrease,
but don't forget to pay lease expense. The expenses may increase, but not
significantly as decreasing of total asset.
2. Decreasing COGS (production cost)
To decrease the production cost, we can make efficiency at material cost and labor
cost. In material cost, we can choose cheaper supplier, but meet standard quality of
our goods. In labor cost, we hired those experienced employees, therefore we can
reduce training cost for labor.
3. Doing tax avoidance (not tax evasion)

Maximizing tax deductible: we attempt to charge cash / non-cash maximum

allowable Act.

Legal standing of corporate entity: we are searching for the right form of
business, such as CV / Fa or PT, with the aim of saving taxes.

Conducting a conglomeration of business: the form of the union establishment

vertically and horizontally.

We should break down the business units into multiple companies, and

Tax deffered income: we delay the recognition of revenue.

4. Decreasing expenses
These expenses example, are:

selling expenses (salaries and wages expense (sales), advertising expense,

total selling expenses), and

administrative expenses (salaries and wages expense (general), depreciation

expenseequipment property tax expense, rent expense, bad debt expense,
telephone and internet expense insurance expense, total administrative
expenses)

We can reduce those expenses, but better when we relieve the expenses.
5. Decreasing interest
With decreasing amounts of loan, we can pay to reduce interest on it. Thus, we have
to increase the equity to persistent the total of its own capital.