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:
Follow these steps to use this equation:
Find net sales at the top of the income statement.
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.
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:
To use this metric, work through these steps:
Use the income statement to find the operating income: Subtract operating expenses and devaluation from the company’s gross income.
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.
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.
Accounting Glossary
accounting equation
The equation Assets = Liabilities + Equity, which demonstrates the two-sided nature of accounting and is useful for explaining the concept of double-entry accounting (or double-entry bookkeeping).
Accounting Glossary
accounting period
The time period for which financial information is being tracked in a business, such as monthly, quarterly, or annually.
Accounting Glossary
accounts receivable
An account that records the amounts that customers owe to a business.
Accounting Glossary
adjusting entry
A correction made to a bookkeeping account that adjusts for accounting errors or other necessary changes at the end of the accounting period.
Accounting Glossary
cash flows
Used to describe the source or sources of cash or how cash is used.
Accounting Glossary
Chart of Accounts
A list of all the accounts used by a business, including what types of transactions go into each account.
Accounting Glossary
debit
An accounting entry that increases an asset or expense account, and decreases a liability or income account.
Accounting Glossary
dividends
A portion of a company’s profits paid by share of common stock on a quarterly or annual basis.
Accounting Glossary
FASB
Financial Accounting Standards Board. FASB is the highest-ranking authority in the private (non-government) sector of the U.S. for making pronouncements on GAAP and for keeping accounting standards up-to-date.
Accounting Glossary
Federal Unemployment Tax
In the U.S., the fund that used to be known simply as Unemployment. Employers contribute to the fund, and states also collect taxes to fill their unemployment fund reserves. (The acronym FUTA means Federal Unemployment Tax Act.)
Accounting Glossary
fidelity bonds
A type of insurance — typically carried by employers for their employees — that helps guard against theft and reduce the risk of loss.
Accounting Glossary
FIFO
First-in, first-out. A method for costs of goods sold in which a business charges out product costs to cost of goods sold expense in the chronological order in which the goods were acquired.
Accounting Glossary
fungible
Describes a product that is interchangeable and virtually indistinguishable from another product.
Accounting Glossary
General Ledger
A summary of all of a business’s accounts and transactions.
Accounting Glossary
IASB
International Accounting Standards Board. The IASB (based in London) is the main authoritative accounting standards setter outside the U.S.
Accounting Glossary
Journals
The location in which bookkeepers keep records (in chronological order) of daily company transactions.
Accounting Glossary
LIFO
Last-in, first-out. A method for costs of goods sold that selects the last item you purchased first, and then works backward until you have the total cost for the total number of units sold during the period.
Accounting Glossary
LLP
Limited liability partnership. A legal structure that state laws offer to qualified professionals in which all the partners have limited liability.
Accounting Glossary
PC
Professional corporation. A legal structure that state laws offer to qualified professionals who otherwise would have to operate as an unlimited partnership liability.
Accounting Glossary
petty cash
A cash account that businesses keep on hand for unexpected expenses.
Accounting Glossary
revenue
Monies that are collected in the process of selling a company’s goods and services.
Accounting Glossary
salvage value
The amount that an asset is worth after it has been fully depreciated.
Accounting Glossary
statement of cash flows
A financial statement that summarizes a business’s cash inflows and outflows during an accounting period.
Accounting Glossary
transactions
Economic exchanges between a business or other entity and the parties with which the entity interacts and makes deals.
Accounting Glossary
worker’s compensation insurance
A type of insurance carried by employers that covers its employees in case they are injured on the job.
