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Computing Return on Operating Asset

Hi, im currently a student studying banking and finance. Sorry to kind of hijack this forum to ask a question as i cant find any answers online. 

I was taught that Return on Operating Asset (ROOA) = (Operating Income + Implicit interest/Short-term borrowing cost) / Operating Assets.

I’m still confused as to why the cost of implicit interest is Added to Operating income in order to compute ROOA instead of minus? 

Any help will be greatly appreciated!

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daan wrote:

Hi, im currently a student studying banking and finance. Sorry to kind of hijack this forum to ask a question as i cant find any answers online. 

I was taught that Return on Operating Asset (ROOA) = (Operating Income + Implicit interest/Short-term borrowing cost) / Operating Assets.

I’m still confused as to why the cost of implicit interest is Added to Operating income in order to compute ROOA instead of minus? 

Any help will be greatly appreciated!

Implicit interest is already subtracted from operating income 

The reason the ratio adds back implicit interest is because it wants to see how effectively a company utilizes its operating assets if implicit costs (cost of supplier credit etc…) weren’t a factor.

Oh i see, i got the idea of how it works now. Thanks a lot!