You can apply the RoA (return on asset) calculation to help:
- estimate the value of other investments such as support blocks, sharemilking businesses, or rental properties
- analyse your own farm
- work out what you can afford to pay for new investments.
Return on Asset calculation
The RoA calculation is a universal approach that applies across a whole lot of investments and businesses.
It is calculated by dividing the Operating profit by the asset value.
|RoA =||Operating profit|
You want to achieve a RoA higher than the cost of borrowing or interest rate.
|RoA =||$300,000 (Operating profit)||= 0.04 or 4%|
|$7,500,000 (asset value)|
You can also use the RoA equation for investment decision making such as working out what you can afford to pay for a farm.
|Asset value =||$250,000
|= 3,600,000 (Land, stock, machinery, dairy shares)|
Find out how you can use the RoA calculation by watching the video below.