Return on Operating Assets

Return on Operating Assets Definition

Return on operating assets is the rate of return that a company gains by having it’s operating assets into efficient use; operating assets are the assets in the balance sheets of the company that are used for daily operations of the company, unlike financial assets which are used as an investment or as a balance sheet statement.

Return on Operating Assets Formula

Return on Operating Assets is calculated as the percentage return from assets that are used in core revenue-generating activities of the business.  It is an efficiency ratio, which is one of the important ratios used in financial planning and analysisFinancial Planning And AnalysisFinancial planning and analysis (FP&A) is budgeting, analyzing, and forecasting the financial data to align with its financial objectives and support its strategic decisions. It helps investors to know if the company is stable and profitable for investment.read more.

It is slightly different from the return on total assets formula, which takes into consideration total assets owned by the firm. In this case, we only take the current assets which are primarily involved in generating revenue for the business. So it has two broad components: –

The formula for return on operating assets is net income over the current asset, and it is expressed in percentage form.

Return on Operating Assets Formula = Net Income / Operating Assets
Return on Operating Assets

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For eg:
Source: Return on Operating Assets (wallstreetmojo.com)

The higher is the return, the better it is for the company. Some examples of operating assets include cash, accounts receivable, inventory, and fixed assetsFixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples.read more that contribute to everyday operations.

Calculation of Return on Operating Assets (with Examples)

Below are some of the examples to understand this in a better manner.

Example #1

Arabic construction limited is a growing construction company in the middle east, and they prepare their financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more are the IFRS reporting standards. By looking at the annual report of the company for the fiscal yearFiscal YearFiscal Year (FY) is referred to as a period lasting for twelve months and is used for budgeting, account keeping and all the other financial reporting for industries. Some of the most commonly used Fiscal Years by businesses all over the world are: 1st January to 31st December, 1st April to 31st March, 1st July to 30th June and 1st October to 30th Septemberread more 2013. The balance sheet asset number stands at $2,000,000, out of which 50% are of current nature. The reported Net income for that particular period is $500,000. Does an analyst want to calculate the Return on the operating asset?

Solution:

First we need to calculate the portion of current assets = 50% of $2,000,000

Current AssetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more =2,000,000 *50 =$1,000,000

Calculation of ROOA

Return on Operating Assets Example-1

= 500,000 / 1,000,000

ROOA =50%

Example #2

XYZ polymers limited is a prepare their financial statements are the IFRS reporting standards. By looking at the annual report of the companyAnnual Report Of The CompanyAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company's performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more for the fiscal year 2016. The balance sheet asset number stands at $2,500,000, out of which 50% are of current nature. The reported Net income for that particular period is $10,000. Does an analyst want to calculate the Return on the operating asset?

Solution:

First we need to calculate the portion of current assets = 50% of $2,500,000

Current Assets= 2500000*50=$1,250,000

Calculation of ROOA

Return on Operating Assets Example-2

=10,000 / 1,250,000

ROOA =1%

Advantages

Limitations 

Conclusion

ROOA is used to measure the company’s operating profitability and operating assets utilization efficiency. Higher ratios indicate higher profitabilityProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance.read more, while ratios below 1 mean inefficient use of the operating assets. Nevertheless, ROOA is an important formula for financial analysisFinancial AnalysisFinancial analysis is an analysis of finance-related projects/activities, company's financial statements (balance sheet, income statement, and notes to accounts) or financial ratios to evaluate the company's results, performance, and trends, which is useful for making significant decisions such as investment, project planning and financing activities.read more.

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