Chartered Financial Analyst (CFA) Level 1 Practice Exam

How is Operating ROA defined?

1. Operating income / average total equity

2. Operating income / average total assets

3. Net income / average total equity

4. Net income / total assets

The correct answer is: Operating income / average total assets

Operating Return on Assets (Operating ROA) is a financial measure that evaluates a company's operational efficiency in generating earnings from its assets. It is defined as operating income divided by average total assets. This ratio focuses specifically on the company's core operations, excluding non-operating income and expenses, which provides a clearer picture of how well the company is utilizing its assets to generate operating income. This focus on operating income allows investors and analysts to assess the effectiveness of a company's asset management, as it reflects the ability to turn assets into revenue through its fundamental, day-to-day operations. The use of average total assets in the denominator helps smooth out any fluctuations in asset values over time, providing a more accurate representation of asset use during the period being analyzed. The other definitions provided relate to different forms of return metrics. For instance, net income includes all income and expenses, not just those from operations, which can skew the understanding of asset utilization for operational purposes. Thus, B is the most appropriate choice for expressing Operating ROA, as it accurately reflects the operational performance relative to the total assets available for use in the business.