Understanding Pre-Interest After-Tax Return of Assets (PIATROA) for Kids: A Simple Example

Pre-Interest After-Tax Return of Assets (PIATROA) is a financial concept that helps us understand how much profit a company or individual is making on their assets after taking into account taxes and interest expenses. Let's break it down and explain it to kids using a simple example:

Imagine you have a lemonade stand business. You buy lemons, sugar, and cups to make lemonade, and you sell it to your friends and neighbors for $1 per cup. You also have a table and a pitcher that you use for your lemonade stand, which are considered as assets.

At the end of the day, you count your sales and expenses. Let's say you sold 50 cups of lemonade for $1 each, so your total revenue is $50. You also spent $10 on lemons, sugar, and cups, and $2 on taxes, leaving you with a profit of $38 before taking into account interest expenses.

Now, let's say you borrowed $20 from your mom to buy the lemons, sugar, and cups, and you need to pay her back with $2 in interest. So, your interest expense is $2, and your taxable profit is now $36 ($38 - $2).

Next, you need to pay taxes on your profit. Let's say the tax rate is 10%, which means you need to pay 10% of your taxable profit as taxes. So, your tax expense would be $3.60 ($36 x 10%).

Now, we can calculate the Pre-Interest After-Tax Return of Assets (PIATROA). To do this, we need to consider the value of your assets, which is the table and pitcher you used for your lemonade stand. Let's say the value of your assets is $30.

PIATROA = (Profit - Taxes - Interest Expense) / Value of Assets

PIATROA = ($36 - $3.60 - $2) / $30

PIATROA = $30.40 / $30

PIATROA = 1.013 or 101.3%

So, your PIATROA is 101.3%. This means that for every dollar of assets you have (the table and pitcher), you are making a profit of $1.013 (or 101.3 cents) after paying taxes and interest expenses.

PIATROA is a measure of how efficiently a company or individual is using their assets to generate profits after considering taxes and interest expenses. It can help assess the profitability and effectiveness of an investment or business venture. It's important to understand different financial concepts as you grow older and start managing more complex finances, and seek guidance from trusted adults or financial advisors to make informed decisions about your money.

Summarise

Let me explain Pre-Interest After-Tax Return of Assets (PIATROA) using a simple example that kids can understand.

Imagine you have a toy collection business. You have a collection of 10 action figures that you bought for $100, and you rent them out to your friends for $2 each per day. So, if all your action figures are rented out for one day, you would make a total revenue of $20 ($2 x 10).

However, you also have some expenses to consider. Let's say you have to pay $1 as taxes on your rental income, and you also have to pay $2 as interest to your sister, whom you borrowed some money from to buy the action figures. So, your total expenses are $3 ($1 taxes + $2 interest).

Now, let's calculate the Pre-Interest After-Tax Return of Assets (PIATROA) for your toy collection business:

PIATROA = (Profit - Taxes - Interest Expense) / Value of Assets

Profit = Revenue - Expenses = $20 - $3 = $17

Value of Assets = $100 (the cost of your action figure collection)

PIATROA = ($17 - $1 - $2) / $100

PIATROA = $14 / $100

PIATROA = 0.14 or 14%

So, your PIATROA for your toy collection business is 14%. This means that for every dollar you have invested in your action figure collection, you are making a profit of 14 cents after paying taxes and interest expenses.

PIATROA helps you understand how well your assets are generating profits after accounting for taxes and interest expenses. It's an important financial measure that can give you an idea of how efficiently you are using your assets to make money. As you grow older and start managing more finances, it's important to understand different financial concepts and seek guidance from trusted adults or financial advisors to make informed decisions about your money.