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How to Calculate an Unlevered Return on Assets

Original post by Leslie McClintock of Demand Media

The return on assets metric is a measure of how efficiently a management team uses the assets entrusted to them to generate profits for the owners. A high return on assets means that the management team has been successful in creating wealth from the assets they were given. An unlevered return on assets is the return on assets a management team gets without having to borrow money.

Contents

Step 1

Determine earnings. The earnings are the net profits a company or subsidiary earns after expenses are taken into account. They are frequently calculated annually or quarterly. If there is no leverage, there should be no interest payments to take into account. You can use operating earnings, which excludes some expenses such as taxes, or you can use total earnings.

Step 2

Calculate the total amount of assets that has been allocated to the company or subsidiary at the start of the accounting period. Normally, the assets under control include both debt and equity. Assets from debt, such as loan proceeds, are cancelled out by a matching column in the liabilities section of the balance sheet. If there is no leverage employed, however, then there will be no debt on the balance sheet, and all of the assets will be from equity.

Step 3

Divide the earnings from the accounting period by the total assets. This figure is the return on assets figure. If there is no leverage employed, the return on assets number should equal the return on equity, since all assets in an unlevered company represent equity.


                   

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About the Author

Leslie McClintock has been writing professionally since 2001. She has been published in "Wealth and Retirement Planner," "Senior Market Advisor," "The Annuity Selling Guide," and many other outlets. A licensed life and health insurance agent, McClintock holds a B.A. from the University of Southern California.


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