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.

Related Terms

interest expense to debt ratio, overhead rate, goodwill to assets ratio, overhead to cost of sales, revenue margin of safety, revenue break-even point, gross profit index, operating income to sales, sales margin