What is the Operating Asset Turnover Ratio?
The operating asset turnover ratio, an efficiency ratio, is a variation of the total asset turnover ratio and identifies how well a company is using its operating assets to generate revenue.
Operating assets are assets that are essential to the day-to-day operations of a business. In other words, operating assets are the assets utilized in the ordinary income-generation process of a business.
- The operating asset turnover ratio is an efficiency ratio that identifies the revenue generation capabilities of a company’s operating assets.
- Examples of operating assets include PP&E, cash, accounts receivable, inventory, and land.
- The operating asset turnover ratio is calculated as sales divided by operating assets.
Examples of Operating and Non-Operating Assets
Examples of operating assets include:
- Property, plant, and equipment (PPE)
- Accounts receivable
- Patents and licenses (if required for business operations)
- Land (if used in the operations of the business)
For a general rule of thumb in determining whether an asset is an operating asset, ask yourself: “If the company does not have this asset, will they be able to continue their day-to-day operations?” If the answer is no, then the asset is likely an operating asset.
Examples of non-operating assets include:
- Marketable securities
- Loans receivable
- Vacant land (unutilized assets)
- Restricted cash (cash that is not available for immediate business use)
Formula for Operating Asset Turnover Ratio
- Sales refers to the total revenue earned by the company
- Operating assets, as defined above, are assets that are essential to the day-to-day operations of a business
Jeff is an equity analyst and is looking to determine the efficiency of a company’s use of its assets. A partial balance sheet of the company is provided as follows:
Additionally, the income statement of the company is provided as follows:
Jeff notes that the company’s balance sheet includes a line item for vacant land at $230,000. He decides to use a variation of the total asset turnover – the operating asset turnover to account for the vacant land that is not currently used in the company’s operations. He calculates the ratio as follows:
Operating Asset Turnover Ratio = (167,971 + 5,100 + 7,805 + 45,500) / 102,007 = 2.22
Therefore, for every dollar invested in its operating assets, $2.22 of revenue is generated.
The operating asset turnover ratio indicates how efficiently a company is using its operating assets to generate revenue. A higher ratio is desirable, as it shows that a company is better at utilizing its operating assets to generate revenue.
Although not as commonly used as the total asset turnover ratio, the operating asset turnover ratio is used when a company holds large assets on its books that are not pertinent to its operations. The ratio excludes such line items in its calculation and, thus, provides information regarding how well revenue-generating assets are being utilized.
It is important to note that there is no absolute “ideal” operating asset turnover ratio. The ratio should be analyzed relative to that of competitors or the industry average. In addition, comparing the ratio across industries does not provide a strong insight, as the operating asset requirement and revenue-generation capabilities differ significantly among industries.
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