Operating return on assets (OROA), an efficiency or profitability ratio, is a variation of the traditional return on assets ratio. Operating return on assets is used to show a company’s operating income that is generated per dollar invested specifically in its assets that are used in its everyday business operations. Like the return on assets ratio, OROA measures the level of profits relative to the company’s assets, but using a narrower definition of its assets.
Formula for Operating Return on Assets
The formula for the operating return on assets ratio is as follows:
Average total assets is the average of beginning and ending values of the company’s assets used in its normal business activities.
The formula differs from the formula for the regular return on assets ratio as follows:
1) It uses EBIT rather than net income as the numerator.
2) It uses regular business operations assets rather than total assets as the denominator.
Example of Operating Return on Assets
Tim is an equity analyst looking to determine the profitability of Apple Inc. Among other ratios that Tim uses, he decides to also use the OROA to determine the level of profits relative to Apple’s operating assets. He compiles the following information from Apple’s 2018 annual report:
Tim calculates Apple’s OROA for the year ended September 29, 2018, as follows:
Tim concludes that Apple generated $0.1913 in operating income per dollar of operating assets.
Benefits of Using Operating Return on Assets
Similar to the traditional return on assets, the operating return on assets is used to determine the effectiveness of business operations and the profitability generated from assets used. The OROA is commonly used by analysts and investors who want to disregard the cost of asset acquisition that can come in the form of debt (i.e., interest expense) or equity and the effect of taxes (which may vary across countries).
There is no “perfect” OROA – the ratio should be compared relative to competitors. With that said, a higher OROA is desirable.
The OROA can be used:
To compare how well a company utilizes its assets among companies that operate in the same industry and are engaged in similar business operations;
On a trended basis to compare its current performance to its performance in the previous year
To indicate how well a company is using its assets to generate operating income.
Key Takeaways
Operating return on assets (OROA) is similar to the traditional return on assets ratio but uses operating income in the numerator as opposed to net income. OROA is used to determine a company’s operating efficiency by revealing the amount of income generated per dollar invested in its operating assets. It excludes assets that are not part of its normal business operations – such as investments in other companies that it may hold.
The OROA can be used to compare with peer companies, used to determine the trend of company performance, and as an indicator of how well a company is using its assets to generate operating income.
More Resources
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:
Learn accounting fundamentals and how to read financial statements with CFI’s free online accounting classes.
These courses will give the confidence you need to perform world-class financial analyst work. Start now!
Building confidence in your accounting skills is easy with CFI courses! Enroll now for FREE to start advancing your career!
Take your learning and productivity to the next level with our Premium Templates.
Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI's full course catalog and accredited Certification Programs.
Gain unlimited access to more than 250 productivity Templates, CFI's full course catalog and accredited Certification Programs, hundreds of resources, expert reviews and support, the chance to work with real-world finance and research tools, and more.