What is operating return on assets?
An operating return on assets, sometimes known as OROA, is a type of calculation designed to help business owners determine what kind of net income a business effort is actually generating. The basic formula for calculating it requires identifying the net value of earnings from various sources, including interest on equity. The total amount of net income generated by the business is divided by the value of the company's assets to identify the current OROA for the operation.
The purpose of identifying the current operating performance of assets is to provide an idea of how well the company manages its expenses. As the total amount of operating expenses is deducted from gross profit to identify the net profit generated, operating costs have a direct impact on the type of return on assets the business is experiencing. When this return is a little low, or has decreased significantly from one period to the next, with no real change in production levels, this can be an indication that waste during the production cycle is increasing. Other types of expenses can also increase, such as marketing costs, shipping costs, or even administrative costs, resulting in a lower net income which in turn causes a lower OROA calculation.
Poor operating asset performance can also be a sign that sales initiatives are not performing well enough to keep up with current production levels. This can often be corrected by reducing production to a certain point over a period of time while excess inventory is used to fill orders, a strategy that can often help generate a more attractive return on assets in later periods. At the same time, restructuring sales and marketing campaigns can also lead to increased consumer demand, which would help to further increase asset returns over time.
Even something as simple as high accounts receivable can have an adverse effect on the operating performance of assets. When this is the case, taking steps to collect invoices for 60 days and withdrawing those obligations can have a serious impact on the level of OROA experienced in the next period. Looking closely at how invoices are prepared and forwarded to customers can also provide valuable insights into how to make the process more efficient, increase cash flow, and motivate customers to pay outstanding bills sooner rather than later.