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.
