What Are Operating Assets? (With Types and Calculations)
By Indeed Editorial Team
Published June 27, 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Companies invest different assets into their operations to generate income and improve productivity. To calculate how companies generate revenue, you can consider the company's asset turnover rate. Understanding how to calculate business assets can help you discover what to improve to promote efficiency and productivity in a company. In this article, we define operating assets, differentiate it from nonoperating assets, discuss the types of assets from operations, explain how to calculate it, highlight the benefits, and review its turnover ratio.
What are operating assets?
Operating assets are resources companies or businesses use to maintain their operations and generate revenue. Examples of these assets include cash assets, fixed assets, accounts receivable, and prepaid expenses. They include all the assets that a company uses to conduct its daily operations, such as office equipment, cash, and inventory.
Operating assets vs. non-operating assets
Non-operating assets are resources that may not be essential to a business's ongoing operations, but may still generate income. They include all resources companies leave untouched for an extended period. An operating asset may become a non-operating asset if a company stops using it to maintain its operations. For example, if a manufacturing company stops producing a particular product, the remaining materials for making that product are non-operating assets. Examples of non-operating assets include vacant land, unused equipment, market securities, loan receivables, and unallocated cash.
Types of these assets
Here are the various types of assets used for operational activities:
Cash assets are resources that you can easily convert to cash. Cash assets are liquid assets, and companies can make them tangible or leave them as intangible. A few assets that financial experts record under the cash assets section include accounts receivable, office equipment, and stock shares.
A fixed asset is a long-term investment that's generally tangible, which companies use to support their operations and generate income. Companies buy fixed assets and utilize them according to their plan. The purpose of fixed assets is to manufacture products or improve the services a company renders rather than converting them to cash or consuming them. Financial experts record fixed assets as plant property and equipment (PP&E) on the balance sheet. Examples of fixed assets include office space, manufacturing plants, furniture, trucks, and computers.
A prepaid expense is an asset a company gets from making advance payments for goods or services they are yet to receive. Products or services that fall under prepaid expenses provide value to a company over a period. Financial experts record this expense as an asset on a company's balance sheet. For example, when a company pays an advance payment for building insurance in January for five years, the payment provides value throughout the validity duration. A few examples of prepaid expenses include insurance policies, bulk orders of supplies, salaries, leased office equipment, taxes, and interest payments.
Tangible assets include all physical assets. Team members in a company use these physical resources to manufacture a product or render a service in the company. Examples of tangible assets include office equipment, factory, product inventory, and vehicles. Tangible assets may be liquid or fixed assets, and their value may depreciate after a period. For example, the value of a truck may reduce after a few years.
Intangible assets are all non-physical assets with a specific amount or value that they generate for a company. These resources may provide value to a company for more than a year. Some examples of intangible assets include trademarks, intellectual property, copyrighted materials, internet domains, and patents.
How to calculate average active assets
If you want to calculate the average operating cost for a company, you can use the formula:
Operating assets (OA) = (Cash assets) + (Total accounts receivable) + (Prepaid expenses) + (Total PP&E) + (Tangible assets) + (Intangible assets)
Follow these steps to calculate a company's active assets:
1. Consider all assets that affect the company's daily operation
The first step is to gather all the assets that influence how the company's operation and promotes revenue generation. Record the company's assets, prepaid expenses, tangible and intangible assets, and tax deferments. Here's an example of a company's balance sheet and its assets for daily operations:
Cash assets: The total of all the company's quick assets is $200,000.
Accounts receivable: During the recording period, the total value of accounts receivable is $300,000.
Prepaid expenses: All the company's prepaid expenses, including interest payments and tax deferments, total $80,000.
Tangible assets: The total value of the company's physical assets, including vehicles and office equipment, is $700,000.
Intangible assets: All the company's intangible assets like internet domains and patents total $800,000.
Fixed assets: The total value of the company's fixed assets is $700,000.
2. Insert the value of each asset in the formula
After identifying all the assets on the company's balance sheet, the next step is to insert the value for each element in the formula. You can insert the values of the assets following this example:
OA = ($200,000) + ($300,000) + ($80,000) + ($700,000) + ($700,000) + ($800,000)
3. Find the total value of all the assets
After inserting the values for each asset in the formula, the final step is to find the total. The sum can help you understand the average value of a company and its ability to generate revenue using its assets. From the example, the final value is $2,780,000. Financial experts use this value to measure a company's profitability and financial level.
Importance of these assets
These assets are essential financial measurements to assess a company's general value and its ability to use resources to generate income. Financial experts can also examine how a company can convert its non-cash assets into cash using this metric. You can also use these assets to calculate a company's operating asset turnover ratio. The ratio signifies how a company utilizes its assets to generate income. Companies may also use this metric to measure their business security.
What are net operating assets (NOA)?
NOAs refer to the total of a company's active assets minus the operational liabilities. To calculate a company's NOA, you require the company's total active assets and the total operating liabilities. Operating liabilities are the expenses that companies incur to maintain their daily operations and ensure that they generate income. The formula for calculating NOA is:
NOA = (Total OA) - (Total operating liabilities)
For example, if a company's total active assets total $200,000, and the total operating expenses are $95,000. When you use the formula, the result for the company's NOA is $105,000.
What is the operating asset turnover ratio?
The operating asset turnover ratio is a financial metric that helps a company understand how it generates income to support its business operations using its operational assets. For example, if a company has a total average operating asset of $1,500,000, and its revenue equals $500,000, the result of this is a 3% turnover rate. The higher the turnover ratio, the higher the company's ability to generate revenue.
How to calculate the operating asset turnover ratio
You can use the turnover ratio formula if you want to calculate a company's operating asset turnover ratio:
Turnover ratio = (Total OA) / (Total revenue)
You can follow these steps to calculate the turnover ratio:
1. Find the company's total average active assets
The first step in calculating a company's turnover ratio is to find the total average operating asset. Identify these assets on the company's balance sheet and calculate the total. For example, assume that the company's total active asset is $2,780,000.
2. Calculate the company's total revenue
After calculating the company's total active assets, you require the total amount of revenue the company generated within a specific period. You can find the total in the company's income statement. This total revenue usually includes the company's income before they deduct the cost of production. Using the same example, assume the total revenue on the company's income statement is $1,000,000.
3. Calculate the turnover ratio using the formula
Finally, divide the company's operating cost by the total revenue. Insert the values into the turnover ratio formula, and divide the assets by the total revenue. With the same example, here's how to calculate the turnover ratio:
Turnover ratio = (Total OA) / (Total revenue)
Turnover ratio = ($2,780,000) / ($1,000,000)
Turnover ratio = 2.78
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