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Operating Assets Ratio Definition

Definition

The word operating assets ratio identifies your calculation used to ascertain the percentage of resources which can be eradicated without impairing operating capacity. A comparatively high operating assets ratio is indicative of a firm that effectively utilizes its funding funds.

Calculation

Operating Assets Ratio = Operating Assets / Total Assets

Where:

  • Operating assets are the ones used to produce revenue.
  • Operating resources and total resources are gross worth, meaning that they aren’t net of depreciation.

Explanation

The resources ratio stipulates that the investor-analyst and company direction with insights to the most use of funding. The percentage contrasts the resources utilized in production, as well as other earnings generating procedures, towards the overall assets owned by the business.

The provider ‘s management group may make use of this ratio to acquire a better comprehension of the resources which may be eliminated without jeopardizing the organizations power to create earnings. Participants can utilize this ratio to ascertain how effectively a business is using resources that are scarce. As is true with the majority of ratios, the values needs to be tracked overtime and benchmarked against businesses in precisely the exact same industry.

Example

Company A features a newly elected Chief Executive Officer. The new CEO is concerned that Company A’s management team has been spending longer about office equipment along with also other nonrevenue producing assets in accordance with its peers. Even the CEO hired a time-management consulting company to regular Company A’s operation in this region. Their findings appear in the table beneath:

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 aforementioned advice, Company A’s working assets ratio has been decided as follows:

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

The direction consultants determined that the business standard was 43 percent. Because of this, this CEO dictate the provider ‘s management team to search for strategies to create this metric above standard, for example eliminating outdated computer and inventory equipment.