Cash Flow on Total Assets Ratio

What is Cash Flow on Total Assets Ratio?

Cash flow on total assets (Cash return on assets) is an efficiency ratio that rates actually cash flows to the company assets without being affected by income recognition or income measurements. The cash flow on total assets ratio is calculated by dividing cash flows from operations by the average total assets.

The cash return on assets 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 measures the proportional net amount of cash spun off as the result of owning a group of assets. The measure is commonly used by analysts to compare the performance of businesses within the same industry, since it is very difficult for someone to obfuscate the cash flow figure. Thus, the ratio is quite a reliable and comparable measure of asset performance across an industry. A high percentage of cash return on assets is especially necessary in an asset-heavy environment (such as any manufacturing industry), where the cash is needed to maintain, update, and invest in additional assets.

The cash return on assets is especially valuable when there is a notable difference between cash flows and reported net income, as can sometimes be the case when the accrual basis of accounting is used. In this situation, calculating the return on total assets can be misleading, so cash flow is used instead of the net income figure.

How to Calculate Cash Return on Assets

The measure is usually derived in aggregate for an entire business, in which case the calculation is to divide the total average assets into the cash flow from operations. The formula is as follows:

Cash return on assets = Cash flow from operations ÷ Total average assets

In the calculation, the cash flow from operations figure comes from the statement of cash flows. The denominator includes all assets stated on the balance sheet, not just fixed assets.

The cash flow to total asset ratio is most often used by company management to estimate when cash will be available and how much cash will be available for future operations. Management can use this ratio to prepare budgets and future performance predictions. In other words, management can use this ratio to help estimate the availability of cash in future periods based on projected operations.

What Does Cash Flow on Total Assets Ratio Mean?

Investors also use the cash flows to total asset ratio to estimate the quality of a company’s earnings. The cash flow to assets ratio is much like the return on total assets ratio, which measures how efficiently a business uses its assets to create a return or income. The cash flows to total assets ratio shows investors how efficiently the business is at using its assets to collect cash from sales and customers. The higher the ratio, the more efficient the business is.

Remember that the cash flows to total assets ratio has nothing to do with income or profitability. It only has to do with the efficiency of cash flows. A business with an extremely high cash flows to total assets ratio might still report a loss on the income statement for the year.

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 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 that is how much money a company is raising from its assets.
  • The formula for 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.

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