What is the cash return on assets (Cash ROA)? How to calculate it with the right formula? Why is it important? If you're looking for answers to these questions, you've come to the right place. In this article, you will learn everything you need to know about cash ROA. Furthermore, you will have access to an excel template that lets you calculate the cash return on assets for more than 65,000 companies with just one click.
What is the cash return on assets?
Asset Efficiency, also known as cash return on assets, is an efficiency ratio that measures the cash flows created from assets without being skewed by income measurements. It is especially helpful when there is a significant difference between a company’s cash flow and reported net income as well as when it is used to compare companies in asset-heavy industries. Investors often use asset efficiency to compare businesses within the same industry, since cash flow is difficult for a company to over or under exaggerate.
A too low cash return on assets indicates that the company is not making efficient use of its assets. If the ratio is too low, there is a high chance that the company will underperform the market. How do you know if the cash ROA of your stock is too low? You have to compare it to other companies in the industry.
How can you check that? Simple! All you have to do is use the Finbox data explorer. Just follow these simple steps:
1) Sign Up for free at Finbox
2) Go to the Finbox data explorer
3) Select the company and the metric you want to check (In this case we want to check the cash ROA. You can find it as the Asset Efficiency ratio)
4) Scroll down to Sector Benchmark Analysis
5) Control in what decile are your stocks (If your company is in the lowest decile, you will likely underperform the market. As you can guess, Apple is in the highest decile.)
How to calculate the cash return on assets with the right formula
Asset Efficiency = Cash From Operations / Average Total Assets
The asset efficiency ratio, also known as the cash return on asset, is calculated by dividing a company’s cash from operations by its average total assets over the same period. Since cash from operations is generated over the course of a period, total assets are averaged between the start and end of the period.
Cash ROA: Benchmarks by Sector
As of May 1, 2020, the sectors with the highest asset efficiency ratios are consumer discretionary, industrials, and consumer staples. Financials, real estate, and Utilities are the sectors with the lowest asset efficiency ratios.
Cash Return On Assets (Cash ROA) Example [+ Excel Template]
I’ve created an example calculation of asset efficiency to try out. To explore the asset efficiency ratios of the 65,000+ companies that Finbox supports, just change the ticker in the spreadsheet. Click here to open the spreadsheet in Google Sheets. Select File > Make a copy to modify the example calculation. If you are not already registered on Finbox, all you have to do is sign up for free here.
Don't underperform the market!
Finbox makes it easy to find companies with high asset efficiency ratios. View the top 100 stocks with the highest asset efficiency ratios here.