Beginning with the basics, FA stands for fixed assets – namely, the permanent property of your business that’s considered a long-term fixture and is unlikely to be liquidated in the immediate future. Anything from land and buildings to desks and computers falls under the fixed asset umbrella, although your company’s fixed assets can be subdivided into three groups (see below).
Your company’s fixed asset accounting and control system ensures that you have the information you need to effectively execute fixed asset management and control your resources. Additionally, the system allows your company to comply with federal and state regulations and ensure that necessary regulatory requirements are met.
Property, plant and equipment are the aforementioned three categories of fixed assets. These typically undergo depreciation over their estimated lifespan. An example of property is land, while any buildings that may be on that land count as plant assets. Items such as office furniture and vehicles belong to the equipment group.
You may be familiar with the abbreviation for return on investments, and return on assets is essentially a synonym of this, except it pertains exclusively to your company’s assets. Simply put, the ROA of your company can be used as an indicator of its efficiency when it comes to using assets to generate earnings. ROA can be calculated by dividing your business’ annual earnings by its total assets to create a percentage. The higher this percentage is, the more efficiently your company is using its assets.
Return on net assets is a calculation used for measuring financial performance, and is calculated by dividing net income by the sum of your company’s fixed assets and net working capital. This directly reflects on your business’ finances – the higher the return, the better.
Return on risk-adjusted capital is a rate of return used to evaluate projects and investments based on the capital at risk, and is used to compare projects with different risk profiles. To calculate RORAC, divide net income by the allocated risk capital.