The cash return on assets ratio (cash ROA) is a financial ratio that measures how efficiently a company generates cash from its assets. It shows how much operating cash flow a company produces for each dollar of assets it owns. Operating cash flow is the cash flow from the company’s core business activities, such as selling goods and services, paying wages, and collecting payments. Assets are the resources that a company owns or controls, such as property, plant, equipment, inventory, and accounts receivable.

The cash return on assets ratio is calculated by dividing the operating cash flow by the average total assets. The operating cash flow can be found on the statement of cash flows, and the average total assets can be found by adding the total assets at the beginning and the end of the period and dividing by two. The formula for the cash return on assets ratio is:

The cash return on assets ratio can be expressed as a percentage or a decimal. A higher cash return on assets ratio indicates that a company is more efficient and profitable in using its assets to generate cash. A lower cash return on assets ratio indicates that a company is less efficient and profitable in using its assets to generate cash.

Example of the Cash Return on Assets Ratio

Let’s look at an example of how to calculate and use the cash return on assets ratio. Suppose Company ABC has the following information on its financial statements:

	Amount
Operating cash flow	$200,000
Total assets at the beginning of the year	$1,000,000
Total assets at the end of the year	$1,200,000

To calculate the cash return on assets ratio for Company ABC, we use the formula:

First, we need to calculate the average total assets by adding the total assets at the beginning and the end of the year and dividing by two:

Average total assets =($1,000,000 + $1,200,000) / 2 = $1,100,000

Then, we plug in the values into the formula:

Cash return on assets ratio = $200,000 / $1,100,000 = 0.1818 or 18.18%

This means that for every dollar of assets that Company ABC owns, it generates 18.18 cents of operating cash flow.

How to Interpret the Cash Return on Assets Ratio

The cash return on assets ratio provides useful information about a company’s financial performance and efficiency. It helps investors and analysts evaluate how well a company manages its assets and converts them into cash. A high cash return on assets ratio means that a company is able to generate more cash from its assets, which indicates that it has a strong cash flow and a high profitability. A low cash return on assets ratio means that a company is unable to generate enough cash from its assets, which indicates that it has a weak cash flow and a low profitability.

The cash return on assets ratio can also be compared with other financial ratios, such as the return on assets (ROA) ratio, the return on equity (ROE) ratio, or the cash flow margin ratio, to gain more insights into a company’s financial performance and efficiency. The return on assets ratio is calculated by dividing the net income by the average total assets. The return on equity ratio is calculated by dividing the net income by the average shareholders’ equity. The cash flow margin ratio is calculated by dividing the operating cash flow by the net sales. These ratios measure the profitability of a company based on different measures of income, equity, and sales.

By comparing the cash return on assets ratio with these other ratios, investors and analysts can assess the quality and sustainability of a company’s earnings and cash flow. A high-quality earnings and cash flow means that a company’s cash return on assets ratio is close to or higher than its other profitability ratios, indicating that the company is generating cash from its operations and not relying on accounting adjustments or non-operating activities. A low-quality earnings and cash flow means that a company’s cash return on assets ratio is lower than its other profitability ratios, indicating that the company is not generating enough cash from its operations and relying on accounting adjustments or non-operating activities.

Benefits and Limitations of the Cash Return on Assets Ratio

The cash return on assets ratio has some benefits and limitations that investors and analysts should be aware of. Some of the benefits are:

• It measures the efficiency and profitability of a company in using its assets to generate cash, which is essential for its growth and survival.
• It reflects the actual cash movements of a company, which is more reliable and objective than the accrual-based profitability ratios.
• It helps assess the quality and sustainability of a company’s earnings and cash flow, which is important for evaluating its financial performance and efficiency.

Some of the limitations are:

• It does not account for the cash flow from investing or financing activities, which may also affect the company’s cash position and value.
• It may vary depending on the industry, the business cycle, or the accounting policies of the company, which may make it difficult to compare across different companies or periods.
• It may be influenced by the working capital management of the company, which may temporarily inflate or deflate the operating cash flow.