Ratios: Cash Return on Assets - Online Tutor, Practice Problems & Exam Prep

The cash return on assets (CRoA) measures the efficiency of a company's asset utilization by comparing operating cash flows to average total assets. The formula is: $\frac{\mathrm{Operating\; Cash\; Flows}}{\mathrm{Average\; Total\; Assets}}$. A higher CRoA indicates better efficiency, while a negative value signals potential issues, as it suggests negative operating cash flows. This ratio is crucial for assessing liquidity and operational performance, guiding investors and management in financial decision-making.

Ratios: Cash Return on Assets

Alright. Let's dive into another ratio here, the cash return on assets. So cash return on assets, it's very similar to the return on assets. When we talked about return on assets, what we're talking about is the net income that we got compared to the average total assets. Well, here we're going to strictly think about cash. So we're going to be focused on the cash flows rather than net income. So we're going to be looking at the operating cash flow specifically based on the amount of assets that we maintain. So, you can imagine that it's better if we're going to make let's say $1,000,000 this year. Well, it's better to make that $1,000,000 with let's say, a $1,000,000 worth of assets rather than $10,000,000 worth of assets, right? The fewer assets we need to make the same amount of money, the better, right? So that's kind of like an efficiency thing. So let's check out the cash return on assets. The formula here, notice in our numerator, we've got our operating cash flows. So these operating cash flows, they come from the statement of cash flows where we show the statement of cash flows. We have 3 sections. We have the operating cash flows which are these numbers that we're looking at here. Operating cash flows, well that's our operations, right? From actually running our business, how much cash flow did we generate? Then there's the investing section. So we've got operating, then we've got investing, which is dealing with buying and selling fixed assets, long-term assets. And then the last section is the financing section, which is where we're dealing with long-term liabilities with the banks, as well as with our shareholders, the equity. Okay? So we're focused on that first section on the statement of cash flows for our operating cash flows. And then, in our denominator, we've got average total assets. Remember, when we do an average, we're always going to take the beginning balance, plus the ending balance, and then divide by 2. Right? Beginning balance plus ending balance divided by 2. Now, if they just give you one number for total assets, well, that's what you're going to use, okay? That will be your total assets. So this is pretty simple, not too much going on there. And one more thing about this ratio is that we do generally show it as a percentage. Okay? So whatever you get there, you're going to have to multiply it by a 100, move the decimal two places, you know, do what you got to do to get it into percentage form. Alright? So how do we analyze this ratio? What is it telling us? Well, remember, it's how much of the numerator for each of the denominator. Okay? So the numerator being operating cash flows will tell us how much operating cash flows we get for each dollar of assets that we maintain. Okay? So that's what this is going to tell us. So, well, when we have a negative cash return on assets, this could be a red flag for the company. Because how could we have a negative ratio here? Well, we couldn't have negative total assets, right? But we could have negative operating cash flows if we didn't bring in as much cash as we had to pay during the period, right? So if we had a net cash outflow, I'd say a net cash outflow from operating activities, well, we would have a negative ratio here. Okay? So we want to do a little more analysis to make sure why we are having negative cash flows from operating activities. Cool? So this isn't the craziest ratio here, why don't we dive in and do some practice problems right now.

XYZ Company had net sales during the period of $380,000 and operating cash flows of $60,000. If total assets were $480,000 at the beginning of the period and $720,000 at the end of the period, what is the company's cash return on assets?

• A. 8%
• B. 10%
• C. 13%
• D. 63%

A company has income before taxes of $120,000. Net sales are $400,000 and gross profit is $300,000. Operating cash inflows totaled $360,000 and operating cash outflows totaled $300,000. What is the cash return on assets, assuming the company has a 40% tax rate, and average total assets were $900,000?

• A. 6.7%
• B. 11.1%
• C. 33.3%
• D. 44.4%

Here’s what students ask on this topic:

What is the formula for calculating Cash Return on Assets (CRoA)?

The formula for calculating Cash Return on Assets (CRoA) is:

$\frac{\mathrm{Operating\; Cash\; Flows}}{\mathrm{Average\; Total\; Assets}}$

This ratio measures the efficiency of a company's asset utilization by comparing the operating cash flows to the average total assets. A higher CRoA indicates better efficiency in generating cash flows from the assets.

How do you interpret a negative Cash Return on Assets (CRoA)?

A negative Cash Return on Assets (CRoA) indicates that the company has negative operating cash flows, meaning it spent more cash than it generated from its core operations during the period. This could be a red flag, suggesting potential liquidity issues or operational inefficiencies. It is essential to investigate further to understand the reasons behind the negative cash flows and address any underlying problems.

Why is Cash Return on Assets (CRoA) important for investors and management?

Cash Return on Assets (CRoA) is crucial for investors and management because it provides insights into the efficiency of a company's asset utilization in generating cash flows. A higher CRoA indicates better operational performance and liquidity, which can attract investors and guide management in making informed financial decisions. Conversely, a negative CRoA can signal potential issues that need to be addressed to improve the company's financial health.

How do you calculate the average total assets for the Cash Return on Assets (CRoA) formula?

To calculate the average total assets for the Cash Return on Assets (CRoA) formula, you take the beginning balance of total assets and the ending balance of total assets, add them together, and then divide by 2. The formula is:

$\frac{\mathrm{Beginning\; Balance\; of\; Total\; Assets\; +\; Ending\; Balance\; of\; Total\; Assets}}{2}$

If only one number for total assets is provided, use that number as the total assets.

What sections of the statement of cash flows are used to calculate Cash Return on Assets (CRoA)?

To calculate Cash Return on Assets (CRoA), you use the operating cash flows section of the statement of cash flows. The statement of cash flows is divided into three sections: operating, investing, and financing. For CRoA, focus on the operating cash flows, which represent the cash generated from the company's core business operations.