﻿ Operating Assets Ratio

# Operating Assets Ratio

## Definition

The term operating assets ratio refers to a calculation used to determine the proportion of assets that can be eliminated without impairing operating capacity.  A relatively high operating assets ratio is indicative of a business that efficiently uses its capital resources.

### Calculation

Operating Assets Ratio = Operating Assets / Total Assets

Where:

• Operating assets are those used to create revenue.
• Operating assets and total assets are gross values, meaning they are not net of depreciation.

### Explanation

The operating assets ratio provides the investor-analyst and company management with insights into the effective use of capital.  The ratio compares the assets used in production, and other revenue producing processes, to the total assets owned by the company.

The company's management team can use this ratio to gain a better understanding of the assets that can be eliminated without jeopardizing the company's ability to generate revenues.  Analysts can use this ratio to determine how efficiently a company is using scarce resources.  As is the case with most ratios, the values should be monitored over time and benchmarked against companies in the same industry.

### Example

Company A has a newly elected Chief Executive Officer.  The new CEO is concerned that Company A's management team was spending more on office equipment and other nonrevenue producing assets relative to its peers.  The CEO hired a well-respected management consulting company to benchmark Company A's performance in this area.  Their findings appear in the table below:

 Asset Type Gross Value (\$000) Cash and Cash Equivalents 5,000 Accounts Receivable 3,000 Short-term Investments 500 Inventory 1,200 Pre-Paid Expenses 400 Land 300 Buildings 15,000 Machinery 23,000 Office Furniture 7,000 Computer Equipment 5,000 Total Assets 60,400

From the above information, Company A's operating assets ratio was determined as follows:

= 23,000 / 60,400, or 38%

The management consultants determined the industry benchmark was 43%.  As a result, the CEO order the company's management team to look for ways to bring this metric above benchmark, including eliminating obsolete inventory and computer equipment.