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What is the Return on Operating Assets?

Return on Operating Assets

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Return on Operating Assets

Return on Operating Assets (ROOA) is a financial metric that gauges the effectiveness with which a company is using its operating assets to produce operating profit. Operating assets typically refer to assets that are essential for a company’s daily operations, such as property, plant, equipment, and inventory, as opposed to non-operating assets like long-term investments.

The formula for ROOA is:

ROOA = Operating Income / Operating Assets

Where:

  • Operating Income is the income derived from a company’s core business operations, often represented by Earnings Before Interest and Taxes (EBIT) or Operating Profit.
  • Operating Assets are the assets directly involved in producing this operating income. This might include items like machinery, buildings, and inventory but exclude things like investment assets or non-operational real estate.

ROOA provides insights into how efficiently a company utilizes its core operational assets to generate profit. A higher ROOA value implies that a company is generating a larger amount of profit for every dollar invested in its operating assets, indicating better utilization and efficiency.

Example of the Return on Operating Assets

Let’s take a fictional retail company named “Elite Stores.”

Elite Stores Financials:

  • Operating Income (EBIT): $5,000,000
  • Operating Assets:
    • Store Buildings (Property): $20,000,000
    • Equipment (Cash Registers, Shelving, etc.): $3,000,000
    • Inventory (Products for Sale): $7,000,000

To calculate the Return on Operating Assets (ROOA) for Elite Stores:

  • Determine the Total Operating Assets:
    Total Operating Assets = Store Buildings + Equipment + Inventory
    Total Operating Assets = $20,000,000 + $3,000,000 + $7,000,000
    Total Operating Assets = $30,000,000
  • Calculate ROOA:
    ROOA = Operating Income / Total Operating Assets
    ROOA = $5,000,000 / $30,000,000
    ROOA = 0.1667 or 16.67%

Analysis:

The Return on Operating Assets (ROOA) for Elite Stores is 16.67%. This means that for every dollar of operating assets (including store buildings, equipment, and inventory), Elite Stores generated a profit of approximately 16.67 cents from its primary business activities before accounting for interest and taxes.

For management or investors, the next step would be to compare this 16.67% ROOA to industry benchmarks or competitors. If the industry average ROOA is, for instance, 12%, then Elite Stores is performing above average in terms of efficiently using its operating assets to generate profit. On the other hand, if the industry average is 20%, Elite Stores might need to investigate potential inefficiencies in their operations.

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