Return on Tangible Assets

How to read it

The numerator is net income allotted to shareholders. The denominator is net property, plant and equipment plus total current assets minus total current liabilities — the plant a company owns plus its working capital. A higher value means each dollar of that capital produces more profit. Rising earnings lift the ratio; building new plant, piling up inventory or receivables, or paying down short-term liabilities enlarges the denominator and lowers it.

What is typical

Asset-light businesses such as software or services tie up little plant and can post high values, while manufacturers, utilities and other capital-heavy companies carry large property bases and usually sit lower. Compare a company with the median for the company’s sector rather than with businesses that run on a different kind of capital.

Pitfalls

The trailing-twelve-months value divides a full year of earnings by the balance sheet at the latest quarter, not by an average over the year, so a large purchase or disposal near quarter end moves it abruptly. The denominator is not total assets less intangibles: it leaves out long-term assets other than plant and nets current liabilities against current assets. When current liabilities exceed current assets by more than the value of plant, the denominator turns small or negative and the ratio becomes huge or flips sign, which says nothing useful about profitability. A loss makes the value negative.