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 ratio

  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
Cost of sales320,000
Gross margin480,000
Operating expenses200,000
Operating income170,000
Finance costs15,000
Income before tax155,000
Income tax expense41,000
Net income114,000
Balance Sheets
Accounts receivable280,000218,000
Current assets350,000256,000
Long term assets450,000375,000
Total assets800,000631,000
Accounts payable150,000130,000
Other liabilities85,00065,000
Current liabilities235,000195,000
Long-term debt145,000130,000
Total liabilities380,000325,000
Retained earnings270,000156,000
Total equity420,000306,000
Total liabilities and equity800,000631,000

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 ROA 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 September 20th, 2019 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 degree from Loughborough University.

You May Also Like