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 income is shown on the income statement. It is sometimes referred to as operating profit or earnings before interest and tax (EBIT).
- 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.
|Cost of sales||320,000|
|Income before tax||155,000|
|Income tax expense||41,000|
|Long term assets||450,000||375,000|
|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%.
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.
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.