What is Operating Return on Assets (OROA)?
Operating return on assets (OROA), which is a profitability ratio, is an extension of the traditional return on assets ratio. Operating return on assets is used to show the company’s operating income that is generated per dollar invested in its assets. In other words, OROA measures the level of profits relative to the company’s total assets.
Formula for Operating Return on Assets
The formula for operating return on assets is as follows:
- Earnings before interest and taxes (EBIT) is equivalent to operating income.
- Average total assets is the average of beginning and ending total asset values for the year.
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 total assets. He compiles the following information from Apple’s 2018 annual report:
Tim calculates Apple’s OROA for the year ended September 29, 2018 is as follows:
Tim concludes that Apple generated $0.1913 in operating income per dollar of total 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 of 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 the 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 always 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 a company to its performance in the previous year; or
- To indicate how well a company is using its total assets to generate operating income.
Operating return on assets (OROA), a profitability ratio, 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 the company’s operating income generated per dollar invested in assets.
An analyst may prefer to use OROA to negate the cost of asset acquisition and the effect of taxes. The OROA can be used to compare among peer companies, used on a trended basis to determine company performance, and as an indicator of how well a company is using its total assets to generate operating income.
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