Return on assets

1
Importance of Logistics
profits earned
Return on Assets=
assets employed

Stocks, Current
money etc. Assets

Property, Assets
Equipment, Fixed Assets
Plant, etc.

2
Importance of Logistics (cont.)

profits earned
Return on Assets=
assets employed
Customer Sales
Satisfaction

Operating Profit
Profit
Costs Margin

Product Price
Features

3
 Example:
ABC currently has sales of $ 20 mil. a year, with a stock level of 35% of
sales. Annual holding cost for the stock is 20% of value. Operating
costs are $8 mil./ year and other assets are valued at $15 mil. What is
the current return on assets? How does this change if stock levels are
reduced to 25% of sales?

Solution: Taking costs over a year, the current position is:

Cost of stock = stock × holding cost = (20 × 0.35) × 0.2 = 1.4 mil. /year
Total costs = operating cost + cost of stock = 8 + 1.4 = 9.4 mil./year
Profit = sales − total costs = 20 − 9.4 = 10.6 mil. /year
Total assets = other assets + stock = 15 + (20 × 0.35) = 22 mil.

Return on assets = profit / total assets = 10.6 / 22 = 0.4818 (48.18%)

4
 Example (cont.):

The new position with stock reduced to 25% of sales has: ???
Cost of stocks = 20 × 0.25 × 0.2 = 1 mil. /year
Total costs = 8 + 1 = 9 mil. /year
Profit = 20 − 9 = 11 mil./year
Total assets = 15 + (20 × 0.25) = 20 mil.
Return on assets = 11 / 20 = 0.55 or 55%

 Reducing stocks gives lower operating costs, higher profit

and a significant increase in Return on Asset (ROA).