Operating Return on Assets Ratio

The operating return on assets ratio (ROA) is used to calculate the percentage rate of return a business gets on it’s assets. The ratio measures the ability of a business to use its assets to generate operating income.

Operating Return on Assets Formula

The operating return on assets is calculated by dividing operating income by the total assets of the business.

The formula is as follows:

Operating return on assets = Operating income / Assets
  1. Operating income is shown on the income statement. It is sometimes referred to as operating profit or earnings before interest and tax (EBIT).
  2. Assets is the total assets amount shown on the balance sheet.

The formula uses the operating income of the business which is the income the business generates before interest and tax expenses have been deducted. Excluding the interest and tax expenses allows comparisons to be made between different businesses independent of how they are financed and the tax environment they operate in.

How to Calculate the Operating Return on Assets

In the example income statement and balance sheets below, the operating income and asset numbers are highlighted in blue.

Income Statement
Revenue 800,000
Cost of sales 320,000
Gross margin 480,000
Operating expenses 200,000
Depreciation 110,000
Operating income 170,000
Finance costs 15,000
Income before tax 155,000
Income tax expense 41,000
Net income 114,000
Balance Sheets
Ending Beginning
Cash 50,000 23,000
Accounts receivable 280,000 218,000
Inventory 20,000 15,000
Current assets 350,000 256,000
Long term assets 450,000 375,000
Total assets 800,000 631,000
Accounts payable 150,000 130,000
Other liabilities 85,000 65,000
Current liabilities 235,000 195,000
Long-term debt 145,000 130,000
Total liabilities 380,000 325,000
Capital 150,000 150,000
Retained earnings 270,000 156,000
Total equity 420,000 306,000
Total liabilities and equity 800,000 631,000

If available, the average of the beginning and ending assets should be used in the calculation as this gives a more accurate representation of the level of assets during the year.

Operating return on assets = Operating income / Assets

Operating income = 170,000
Assets = (800,000 + 631,000) / 2 = 715,500 (Average)

Operating return on assets = 170,000 / 715,500 = 23.76%

In this example, the average operating return on assets for the year is 23.76%.

This calculation can be carried out for any business. Using the income statement and balance sheets of Apple as an example, we have the following calculation.

Operating return on assets = Operating income / Assets

Operating income = 48,999
Assets = (207,000 + 176,064) / 2 = 191,532 (Average)

Operating return on assets = 48,999 / 191,532 = 25.58%

Operating Return on Assets and the Financial Projections Template

Investors use the return on assets calculation to compare different businesses in deciding whether to invest or not. If you are seeking funding for your business by way of equity investment, it is likely that you will need to include an estimate of the operating return on assets the business expects to make in your financial projections.

This return on assets ratio can be calculated for projected figures, and is included in our financial projections template on the financial ratios page. For simplicity, the operating return on assets calculation has been based on the ending balance sheet assets.

Last modified April 28th, 2017 by Michael Brown

About the Author

Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.

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