The cash return on assets (cash ROA) ratio is a measure of the operational cash flow against the total assets owned by a business. It displays the performance of a business. Simply put, it’s examining how much money a company is raising from its assets. All businesses aim to generate as much cash as possible from their available assets.
Cash return on assets enables businesses to calculate how profitable their assets are and determine which assets are bringing in more cash. It analyzes how much cash flow is obtained from operational activities. It is a measure of the value of the cash return of a single dollar. A tool that is very popular among investors, it helps determine which company would be the best option to invest in with fewer risks and create more value for its shareholders.
The cash return on assets ratio on its own is not much to go on if it is not measured against other companies in the same industry. It’s more important in companies or industries where the businesses are asset-heavy. This ratio is considered a very stable and reliable way of comparing the value of assets across the same industry.
Cash Return on Assets Ratio Formula
The total average assets are obtained by summing the value of total assets at the beginning and the end of the period and dividing the result by 2:
When going through a company’s records to get the operational cash flow and the value of assets, the values are usually found in the statement of cash flows and balance sheet. It is easy to find the operating cash figure from cash flow but balancing the sheets to find the total value of assets can be quite tedious.
Cash Return on Assets Ratio Example
Mr. Ang is an investment manager who is approached by Bethany. She wants to invest in a company XYZ. Mr. Ang then looks into the company’s financial statements, to find out if it would be a sound investment. Here is what he found.
Year 1
- Operating Cash Flow: $460,000
- Average Total Assets: $6,000,000
Year 2
- Operating Cash Flow: $550,000
- Average Total Assets: $7,000,000
Year 3
- Operating Cash Flow: $700,000
- Average Total Assets: $8,000,000
Let’s work out what the cash ROA is for each of the three years:
In this case, the cash ROA is 7.67%, 7.86% and 8.75% for years one, two and three respectively.
Looking at these results, you can see that the company's performance has gradually increased over time and the growth seems favorable for investment.
But this result alone might not be enough analysis to give Bethany the information she needs. Mr. Ang could compare it against other companies in the same industries as XYZ.
Now comparing the company with others in the industry, he might see that although it has progressed over the years, it is still growing at a slower rate than its competitors. If it still has the lowest cash return on assets ratio, then it wouldn’t be a great idea for Bethany to invest.
Cash Return on Assets Ratio Analysis
Cash return on assets ratio is targeted at companies with heavy assets and is used in the evaluation of businesses in industries like manufacturing where most of their investments are tied up in assets. It helps these companies find out if they are maximizing their assets hence making the best of their investments or not.
There is however no fixed value for the cash return on assets ratio. It is based on industries and how it measures against other companies in that industry. There are some industries where having a cash return on assets ratio of 1% is considered high while in other industries a company with a cash return on assets ratio of 10% might be doing very poorly. The cash return on assets ratio compliments the net income; meaning that business efficiency is not measured by just net income alone.
Cash return on assets ratio is also the best way to measure how your competitors are doing and if you are beating them or not. In cash return on assets ratio, the higher it is the better. Companies with higher cash return on assets ratio are making better use of their assets in increasing their cash flow. So what’s a good cash return on assets ratio?
To be able to determine if a company’s cash return on assets ratio is good or not, you need to look at it over the past few years. If it has increased then that is always a good sign, but if it is decreasing, even if the net cash flow is increasing, that is not a good sign. It is also ideal to compare its ratio to other companies in the same industry.
Cash Return on Assets Ratio Conclusion
- The cash return on assets ratio is a measure of the operational cash flow against the total assets. It displays the performance of a business which is how much money a company is raising from its assets.
- The formula for the cash return on assets ratio requires two variables: operational cash flow and average value of all assets.
- The cash return on assets ratio varies by industry. The cash return on assets ratio of 10% might be high in one industry but very low in another.
- Just calculating the cash return on assets ratio is not enough, you have to analyze it over the years and compare it to other companies in the same industry.
Cash Return on Assets Ratio Calculator
You can use the cash return on assets ratio calculator below to quickly get the cash return on assets ratio by entering the required numbers.
FAQs
1. What is a cash return on assets ratio?
A cash return on assets ratio is a way to measure the performance of companies in industries that heavily depend on their assets such as manufacturing and construction.
It measures how efficient a company is at utilizing its assets, thus increasing or decreasing its cash flow.
2. How do you calculate the cash return on assets ratio?
The formula for calculating the cash return on assets ratio is simple. It requires two variables: operational cash flow and the average value of all assets.
So to calculate it, divide the operating cash flow by the average value of assets in a company for a particular year. The resulting number would be your cash return on assets ratio.
The formula would be:
Cash ROA = Operational Cash Flow / Total Average Assets
3. What is a good cash return on assets ratio?
An ROA of 5% or better would be considered good in most industries. While 20% or more is very good. The higher the number is, the better.
4. What does a return on assets tell you?
The return on assets value tells you how efficient a company is at utilizing its assets, thus increasing or decreasing its cash flow. Recurring high ROAs are often indicative of businesses that use their resources efficiently.
Moreover, it helps you compare your performance with competitors in the same industry, or even throughout different industries.
5. What is an example of a high Cash Return On Assets Ratio?
A retail company that generates an 8% cash return on assets ratio is considered high.
