How to Use Operating Asset Profitability Metrics

How effectively is a company using its operating assets to generate sales? To find out, use a ratio called operating asset turnover, which you calculate like this:

image0.jpg

Follow these steps to use this equation:

  1. Find net sales at the top of the income statement.

  2. Find average operating assets by using the balance sheets from the current year and the previous year: Add together the operating assets of the current year and the operating assets of the previous year and divide that value by 2.

  3. Divide net sales by average operating assets to get the operating asset turnover.

This metric determines how well a company is at using those assets used specifically in the company’s primary operations to generate sales. Operating asset turnover is different from total asset turnover in that it doesn’t take into consideration all assets and it may be more reflective of the company’s competitiveness in its primary operations.

How effectively does a company use its operating assets to generate income? Use the return on operating assets to find out:

image1.jpg

To use this metric, work through these steps:

  1. Use the income statement to find the operating income: Subtract operating expenses and devaluation from the company’s gross income.

  2. Use both the current year’s balance sheet and the previous year’s balance sheet to find the average operating assets: Add together the operating assets of the current year and the previous year and divide that value by 2.

  3. Divide operating income by average operating assets to get the return on operating assets.

The primary difference between return on operating assets and operating asset turnover is that return on operating assets measures a company’s ability to turn operating assets into income rather than just sales.

In other words, return on operating assets determines whether a company is using its operating assets to develop profitability rather than just a volume of sales. Like other measures of operating assets, this one differs from return on assets in that it focuses on the company’s core operations instead of giving an overall picture.

blog comments powered by Disqus
Advertisement

Inside Dummies.com