Published: April 28, 2025  Updated: April 24, 2025

Tracking ROA: How to Improve Return on Assets with CMMS

In the business world, you can't consider profitability only as about making money. You want to make the most of what you have. Enter: Return on Assets (ROA) comes in. In this article, we'll discuss—

• Understanding ROA: Formula and Interpretation.
• Real-World Examples: Return on Assets in Action.
• Tracking ROA: A Pathway to Operational and Financial Improvement.
• What Affects Return on Assets? Key Influencing Factors.
• How CMMS Software Improves Return on Assets.

Understanding ROA: Formula and Interpretation

Companies use this key financial metric to measure how effectively they utilize assets to generate profits. By understanding and tracking ROA, businesses gain valuable insights into their operations and identify areas for improvement.

To determine ROA, use the following calculation:

ROA = Net Income / Average Total Assets

Net Income: The company's profit after paying expenses. You can find it on the income statement.

Average Total Assets: This represents the average value of a company's assets in a specific period. A common calculation takes the average of the beginning and ending total asset values listed on the balance sheet.

Expressing ROA as a percentage provides a clearer picture of a company's profitability relative to its asset base. A higher ROA indicates better efficiency in converting assets into profits. Conversely, a lower ROA suggests the company might underutilize assets or incur unnecessary expenses related to maintaining them.

Real-World Examples: Return on Assets in Action

Industry Matters: A "good" ROA can vary significantly depending on the industry. A capital-intensive industry like utilities might have a lower ROA compared to a service-oriented industry like consulting. This may hold true even if both companies perform well within their respective sectors. To create a meaningful comparison, analyze ROA alongside companies within the same industry.

Let's explore ROA across different industries:

• Manufacturing: A manufacturing company with a high ROA might indicate efficient production processes, well-maintained equipment, and minimal wasted resources.
• Retail: A high ROA in retail could signify strong inventory management, optimized store layouts that encourage sales, and effective marketing strategies that drive customer traffic.
• Software-as-a-Service (SaaS): For SaaS companies, a high ROA might reflect a well-developed customer base, efficient subscription management systems, and minimal infrastructure costs.

While I've given only a few examples, keep in mind the specific factors influencing ROA will vary depending on the company's business model and industry dynamics. Read on for further discussion of some of those factors.

Tracking ROA: A Pathway to Operational and Financial Improvement

So, why should companies track their ROA?

• Identify Operational Inefficiencies: ROA analysis can reveal areas where a company doesn't effectively use assets. Reasons include excessive inventory, underutilized equipment, or inefficient operational processes. By pinpointing these inefficiencies, companies can take corrective actions and improve their overall profitability.
• Benchmarking and Competitor Analysis: Comparing ROA with industry peers provides valuable insights into a company's relative performance. Identifying companies with consistently higher ROA allows businesses to learn from their best practices. They can also implement similar strategies to enhance their own efficiency.
• Investment Decisions: When evaluating potential investments in new assets or business ventures, ROA can help assess the expected return on the investment. By comparing the projected ROA of the investment to the company's current ROA, businesses can make informed decisions about resource allocation.
• Risk Management: A declining ROA might raise a red flag for potential financial trouble. Tracking ROA over time allows companies to identify negative trends early on. With proper planning and using an Issue or a Decision tree, you can implement corrective measures before problems escalate.

For a definitive guide to an Issue Tree, read the article at Crafting Cases.

What Affects Return on Assets? Key Influencing Factors

Many factors can influence a company's ROA.

• Profit Margin: A higher profit margin, which indicates a greater profit earned for each dollar of sales, will naturally lead to a higher ROA. Companies can improve their profit margin by reducing expenses, increasing sales volume, or a combination of both.
• Asset Turnover Ratio: This ratio measures how effectively a company generates sales from its assets. A higher asset turnover ratio indicates better utilization of assets. This leads to a higher ROA.
• Businesses can improve their asset turnover ratio by tightening operations such as reducing inventory levels. Also, they can discuss implementing better asset management and utilization.
• Debt Levels: Companies can use debt financing as a valuable tool for growth. However, excessive debt can lead to higher interest expenses. This may result in lowering a company's profitability and reducing ROA. You must maintain a healthy balance between debt and equity financing.

How CMMS Software Improves Return on Assets

A computerized maintenance management system (CMMS) can be a game-changer for tracking and optimizing assets. How can this software benefit return on assets?

• Preventive Maintenance (PM): A CMMS helps companies schedule preventive maintenance activities. These include lubrication, inspections, and replacement parts. This proactive approach can significantly extend the lifespan of assets. It also reduces the need for costly repairs and replacements.
• Improved Asset Utilization: A CMMS provides a centralized platform for tracking equipment availability and usage. This allows companies better oversight of usage. Combined with asset performance data (see the last point), maintenance supervisors can improve PM practices. Again, you want the most out of your assets. How do you achieve this? The correct maintenance. Training the operator. Using various data to make improvements.
• Reduced Inventory Costs: By tracking spare parts inventory within the CMMS, companies can avoid overstocking and understocking situations. Technicians can do their jobs more efficiently. Parts remain available. You have a noticeable reduction in both planned and unplanned downtime.
• Data-Driven Decision Making: A CMMS collects valuable data on asset performance, maintenance history, and repair costs. It will track equipment readings and cost of maintenance over a specific time period.
You use this data to identify recurring issues, prioritize maintenance tasks, and make decisions about asset lifecycle management. This proactive approach minimizes unexpected breakdowns and associated costs.

The CMMS Impact: Real-World Gains in ROA

Let's return to the industry examples from above. Again, keep in mind the exact impact of a CMMS on ROA can vary depending on the specific company and industry.

• A manufacturing company implements a CMMS and experiences a 10% reduction in unplanned equipment downtime. This translates to increased production output, potentially leading to a 2% increase in sales. Additionally, the CMMS facilitates preventive maintenance, extending equipment life by 5 years. This reduces replacement costs and lowers overall maintenance expenses. By combining these factors, the company's ROA could see a significant improvement.
• A retail store chain utilizes a CMMS to track and maintain refrigeration units. This proactive approach minimizes food spoilage and improves energy efficiency. Again, this leads to cost savings. The CMMS also optimizes spare parts inventory, reducing carrying costs. These combined savings can contribute to a higher profit margin for the stores.

  Tracking ROA as a Guide to Asset Efficiency

  Return on Assets sheds light on a company's ability to generate profits from its assets. With tracking and analysis, businesses gain valuable insights into their operational effectiveness and identify areas for improvement. Implementing CMMS software can significantly enhance ROA by:

  • Promoting preventive maintenance.
  • Optimizing asset utilization.
  • Reducing inventory costs.
  • Facilitating data-driven decision-making.

  Call Mapcon Technologies at 800-922-4336. Ask for a free demonstration of a powerful, easy-to-use, and priced right system that will up your maintenance game. With proper use of MAPCON, you'll see reduced cost and enhanced return on assets.

  Try Our CMMS Software Today!

  MAPCON CMMS software empowers you to plan and execute PM tasks flawlessly, thanks to its wealth of features and customizable options. Want to see it for yourself? Click the button below to get your FREE 30-day trial of MAPCON!

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