# 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 .

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: –

• Net Income: Net income involves the [/wsm-tooltip] of the business, which is left for the distribution to the shareholders.
• Current Assets: Current Assets involve those assets like cash, accounts receivables, and of the company, which is responsible for the generating of revenue/ income.

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

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 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 are the IFRS reporting standards. By looking at the annual report of the company for the 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

Calculation of ROOA

= 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 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

=10,000 / 1,250,000

ROOA =1%

• The formula is used in the industry to calculate the return on the asset, which is an important return ratio matrix for the investors and the shareholders, and it is used for and peer group analysis.
• It is different from the return on total asset, and the analysis becomes more meaningful because it takes into consideration only those asset that is actually used for the generation of revenue and operating in the day to day business.

### Limitations

• Since the formula takes into consideration the book value of the asset, it significantly understates the value of the asset from the actual market value of those assets.
• The formula needs to be adjusted in the financial analysis if companies use different  or .

### Conclusion

ROOA is used to measure the company’s operating profitability and operating assets utilization efficiency. Higher ratios indicate higher , while ratios below 1 mean inefficient use of the operating assets. Nevertheless, ROOA is an important formula for .

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