After talking about so many indicators and metrics, we can ask ourselves if there is something that encompasses and can give us an indication of the total result of our business.
The return on assetsknown as ROA (return on assets), is a great tool for measuring profitability since it takes into account:
- The utility that we can generate.
- The asset that we immobilize to obtain it.
It is important to note that ROA is not the same as ROI (return on investments, or return on investment).
The concept of is broader and can be applied in various ways for investments in general. The main difference with the ROA is that it uses for the calculation the assets that a company immobilizes in its activities.
Profitability is the result of the turnover of the business in a given time, generally one year, and its relationship with the fixed assets that we sacrifice to obtain it. Profitability tells us how attractive our business is.
It offers an internal rate of return that allows us to:
- Compare it with that of another company with similar characteristics.
- Compare it with the interest rate that the bank requires.
- Compare it with other investments.
- Offer an indicator for investors.
Profitability calculation
To calculate the profitability of your online business, we are going to return to and we’ll get the utility for the period of one year:
Utility = Marginal Contribution – Expense table
And, on the other hand, we are going to determine the fixed asset that we use to obtain it and it is made up of:
Fixed assets = Working capital + Fixed assets
working capital
In an online store, the working capital is made up of:
- Available stock: That amount of items that you reserve so as not to delay deliveries, form an amount of money that is immobilized. Also the raw material you have in process, if you produce.
- collections: It is the average amount of money that is immobilized since you make the sale until you collect the cash. This is the case of , which withholds the money for several days before it is available.
- Cash: It is the balance that you usually maintain in your accounts and in your box.
- Deposits: These are the positions in guarantee and the balances that you usually maintain, for example in .
fixed assets
- Intangible assets: Depending on the case, they can be taken into account as the initial expenses to open an ecommerce, such as a web designer, or the database of clients obtained.
- Inmobilized material: In an online store they could be the computers, the furniture and all the machines necessary for the development of the business.
The ROA, then, is calculated as follows:
ROA = (Profit / Assets) x 100
Another interesting way to get to the same result is:
ROA = (Profit / Sales) * (Sales / Assets) x 100
The latter is called the DuPont index and it offers us another opening of the information that will serve us for analysis and decision making.
Synthesis
If you have a business, it is key that you can understand if the results you get are what you expected. To achieve this goal, one of the most important factors is knowing whether or not it is profitable. This will allow you understand what happens to the income generated by your online store: Is it really a profit?
Knowing the profitability of your business serves to better understand your situation compared to the competition, what type of loans or credits you could ask for in a bank and it is a great tool to attract investments, among other things.
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