The pre - interest return on assets is a purer measure of profitability in relation to assets because, as result of interest and tax levied, the net income after tax does not reflect operating figures correctly.
This ratio is used for decisions on pricing and is computed as:
Pre - Interest return on assets =
earnings before interest and tax
------------------------------------------------
average total assets
Excerpt from the financial statement of XYZ ltd:
Earning before interest and tax in 2006 and 2007 is 1,200 and 1,500 crores.
Total assets in 2006 and 2007 is 10,000 and 14,000 crores.
The pre-interest return on assets in 2007 is
1500
------------------------------ X 100 = 12.5%
.5 X (10,000 + 14,000)
The above return should be measured against the return earned by other similar companies to establish whether in fact the return is high or low.