# Cash Return On Assets Ratio : Asset’s Cash Generating Ability

The cash return on assets (cash ROA) ratio is used to compare a business’s performance with that of other industry members. It is an efficiency ratio that rates actual cash flows to company assets without being affected by income recognition or income measurements. The ratio can be used internally by the company’s analysts or by potential and current investors.

**Understanding Cash Return On Assets Ratio**

Fundamental analysts believe a stock can be undervalued or overvalued. That is, fundamental analysts believe in-depth analysis can help increase portfolio returns. To do this analysis, fundamental analysts use a variety of tools including ratios. Ratios help analysts compare and contrast data points such as return on assets (ROA) and cash ROA. When these two ratios diverge, it is a sign that cash flow and net income are not aligned, which is a point of concern for analysts.

ROA vs. Cash ROA

Return on assets is calculated by dividing net income by average total assets. The answer tells financial analysts how well a company is managing assets. In other words, ROA tells analysts how much each dollar of assets is generating in earnings. A high ratio means the company earns more net income from $1 of assets than the average company, which is a sign of efficiency. A low ratio means a company makes less net income per $1 of assets, which is a sign of inefficiency. The issue is that net income is not always aligned with cash flow. As a solution, analysts use cash ROA, which divides cash flows from operations (CFO) by total assets. Cash flow from operations is specifically designed to reconcile the difference between net income and cash flow. In this way, it is a more accurate number to use in the calculation of ROA than net income.

Case:

PT Angin Ribut has net income IDR 100 Million and Total Asset IDR 500 Million. So we calculate Return on Asset as:

It also has high sales growth due to Customer Financing Program to help Customer by its product with easy credit scheme.

This makes Net Income value high not because receiving cash from customer but credit sales from customer / no cash.

Credit Sales will be a deductor from Cash Flow from Operation, so for example Credit Sales is IDR 50 million then :

Cash Flow from Operation is = IDR 100 Million – IDR 50 Million = IDR 50 Million.

So we can calculate Cash Return On Asset as:

So if we compare Cash ROA to ROA, means the PT Angir Ribut’ Asset actually can generate “Cash Earning” only “half” of its originally calculated. This indicated inefficiency in cash flow compared to company’s asset.

source :

Investopedia.com

BusinessInsider.com