What is Operating Assets Ratio?
Operating assets ratio is a measure of how efficiently a company uses its operating assets to generate revenue. Operating assets are the assets that are essential for the day-to-day operations of a business, such as property, plant, equipment, cash, accounts receivable, inventory, and land. Non-operating assets are the assets that are not directly involved in the core business activities, such as marketable securities, loans receivable, vacant land, and restricted cash.
The operating assets ratio is calculated by dividing the total revenue by the average operating assets. The formula is:
Operating Assets Ratio = Total Revenue / Average Operating Assets
The higher the operating assets ratio, the better the company is at utilizing its operating assets to generate revenue. A low operating assets ratio may indicate that the company has excess or idle operating assets that are not contributing to the revenue generation.
How to Calculate Operating Assets Ratio in Excel?
To calculate the operating assets ratio in Excel, you need to have the following data:
- Total revenue for the period (usually a year)
- Total operating assets at the beginning of the period
- Total operating assets at the end of the period
You can use the following steps to calculate the operating assets ratio in Excel:
- Enter the data in a worksheet, such as below:
| A | B | C |
|---|---|---|
| Total Revenue | $10,000,000 | |
| Operating Assets (Beginning) | $8,000,000 | |
| Operating Assets (Ending) | $9,000,000 |
- Calculate the average operating assets by adding the beginning and ending operating assets and dividing by 2. You can use the formula
=AVERAGE(B2:B3)in cell C2, such as below:
| A | B | C |
|---|---|---|
| Total Revenue | $10,000,000 | |
| Operating Assets (Beginning) | $8,000,000 | |
| Operating Assets (Ending) | $9,000,000 | |
| Average Operating Assets | $8,500,000 |
- Calculate the operating assets ratio by dividing the total revenue by the average operating assets. You can use the formula
=B1/C2in cell C3, such as below:
| A | B | C |
|---|---|---|
| Total Revenue | $10,000,000 | |
| Operating Assets (Beginning) | $8,000,000 | |
| Operating Assets (Ending) | $9,000,000 | |
| Average Operating Assets | $8,500,000 | |
| Operating Assets Ratio | 1.18 |
- Format the result as a percentage with two decimal places, such as below:
| A | B | C |
|---|---|---|
| Total Revenue | $10,000,000 | |
| Operating Assets (Beginning) | $8,000,000 | |
| Operating Assets (Ending) | $9,000,000 | |
| Average Operating Assets | $8,500,000 | |
| Operating Assets Ratio | 117.65% |
How to Interpret Operating Assets Ratio?
The operating assets ratio indicates how much revenue a company generates for every dollar of operating assets invested. A higher ratio means that the company is more efficient in using its operating assets to generate revenue. A lower ratio means that the company has more operating assets than needed, or that the operating assets are not productive enough.
For example, if Company A has an operating assets ratio of 120%, it means that for every $1 of operating assets, it generates $1.20 of revenue. If Company B has an operating assets ratio of 80%, it means that for every $1 of operating assets, it generates $0.80 of revenue. Company A is more efficient than Company B in using its operating assets to generate revenue.
However, the operating assets ratio should not be used in isolation, as it does not account for the profitability, growth, risk, or quality of the revenue or the operating assets. It is also important to compare the operating assets ratio with the industry average and the company’s historical performance, as different industries and companies may have different levels of operating assets required.
Example of Operating Assets Ratio
Let’s assume that you want to compare the operating assets ratio of two companies in the same industry: Company X and Company Y. The following table shows their financial data for the year 2023:
| Company X | Company Y | |
|---|---|---|
| Total Revenue | $50,000,000 | $40,000,000 |
| Operating Assets (Beginning) | $30,000,000 | $25,000,000 |
| Operating Assets (Ending) | $35,000,000 | $30,000,000 |
Using the formula above, you can calculate the operating assets ratio for each company as follows:
- Company X: Operating Assets Ratio = $50,000,000 / (($30,000,000 + $35,000,000) / 2) = 1.54
- Company Y: Operating Assets Ratio = $40,000,000 / (($25,000,000 + $30,000,000) / 2) = 1.45
The results show that Company X has a higher operating assets ratio than Company Y, which means that Company X is more efficient in using its operating assets to generate revenue. However, this does not necessarily mean that Company X is more profitable or successful than Company Y, as there may be other factors affecting their performance, such as the cost of operating assets, the quality of revenue, the growth rate, the risk level, and the industry norms.
Other Approaches to Measure Operating Asset Efficiency
Besides the operating assets ratio, there are other approaches to measure the efficiency of operating assets, such as:
- Operating Asset Turnover Ratio: This ratio measures how many times a company’s operating assets are turned over in a period. It is calculated by dividing the total revenue by the average operating assets. A higher ratio means that the company is more efficient in generating revenue from its operating assets. A lower ratio means that the company has excess or idle operating assets.
- Return on Operating Assets: This ratio measures how much profit a company earns from its operating assets. It is calculated by dividing the operating income by the average operating assets. A higher ratio means that the company is more profitable from its operating assets. A lower ratio means that the company has low profitability or high operating costs.
- Operating Asset Margin: This ratio measures how much operating income a company generates for every dollar of operating assets. It is calculated by dividing the operating income by the total revenue, and then multiplying by the average operating assets. A higher ratio means that the company has a higher operating income per dollar of operating assets. A lower ratio means that the company has a lower operating income per dollar of operating assets.
