Reading: Lesson 7 - Analyzing and using the financial results—Rate of return on operating assets

Analyzing the ratios of income statement and balance sheet items from one year to the next can reveal important trends. Management uses these ratios to measure performance by establishing targets and evaluating results. As an example, look at Exhibit 16. Analysts use these figures to calculate the ratios and to explain the importance of this information to management and investors. To determine the rate of return on operating assets for Dement & Peery for 2009 and 2010, use the following formula:

2009: USD 433,000/USD 5,329,000 = 8.13 percent

2010: USD 560,000/USD 5,441,000 = 10.29 percent

Net operating income is also called net operating earnings or income before interest and taxes. In calculating Dement & Peery's ratio, we have assumed that all assets are operating assets used in producing operating revenues. This ratio measures the profitability of the company in carrying out its primary business function. For Dement & Peery, these figures indicate a slight increase in the earning power of the company in 2010. Net operating income increased more than proportionately compared to the increase in operating assets. Perhaps this performance justifies the increase in operating assets. In this chapter, you learned how to account for the acquisition of plant assets and depreciation. The next chapter discusses how to record the disposal of plant assets and how to account for natural resources and intangible assets.