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 |
| Assets |
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 (Operating profit) |
= 3,600,000 (Land, stock, machinery, dairy shares) |
| 7% (RoA) |
Video
Find out how you can use the RoA calculation by watching the video below.
