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Asset turnover
Course: FIN 410, Spring 2012School: Rutgers
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A businessinvestsinassets(machinery,inventoriesetc)inordertomakeprofitablesales,andagoodway Assetturnover Thisratioconsiderstherelationshipbetweenrevenuesandthetotalassetsemployedinabusiness. tothinkabouttheassetturnoverratioisimaginingthebusinesstryingtomakethoseassetsworkhard(or sweat)togeneratesales. Theformulaforassetturnoveris: Intermsofwheretogetthenumbers: Revenueobviouslycomesfromtheincomestatement...
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A
businessinvestsinassets(machinery,inventoriesetc)inordertomakeprofitablesales,andagoodway Assetturnover
Thisratioconsiderstherelationshipbetweenrevenuesandthetotalassetsemployedinabusiness.
tothinkabouttheassetturnoverratioisimaginingthebusinesstryingtomakethoseassetsworkhard(or
sweat)togeneratesales.
Theformulaforassetturnoveris:
Intermsofwheretogetthenumbers:
Revenueobviouslycomesfromtheincomestatement
Netassets=totalassetslesstotalliabilities
Theresultingfigureisexpressedasanumberoftimesperyear
Thecalculationcanbeillustratedasfollowsusingthefollowbalancesheetandincomestatement
2012
Revenue
Netassets
Assetturnover
2011
000
000
21,450
19,780
4,455
3,225
4.8times
6.1times
Howtoevaluatethedatainthetableabove?
Atfacevalue,theassetturnoverhasdeterioratedfallingfrom6.1timesperyearto4.8times. Whymight
thishaveoccurred?
Thebestcluesappeartobeinthebalancesheet. Thevalueoffixedassetshasrisenbyover300,000, Thatmeansthatnetassets
thebusinesshasover500,000morecashandthevalueofloanshasfallen.
haverisenbyalmost40%.
Thatcertainlylookslikegoodnews. However,revenueshaveonlygrownby8%. Hencethelowerasset
turnovereventhoughthestoryisapositiveone!
Youcanseethatparticularcareneedstobetakenwiththeassetturnoverratio. Forexample:
Thenumberwillvaryenormouslyfromindustrytoindustry.Acapitalintensivebusinessmayhave
a much lower asset turnover than a business with low net assets but which generates high
revenues.
Theassetturnoverfigureforaspecificbusinesscanalsovarysignificantlyfromyeartoyear.For
example,abusinessmayinvestheavilyinnewproductioncapacityinoneyear(whichwould
increase net assets) but the revenues from the extra capacity might not arise fully until the
followingyear
Theassetturnoverratiotakesnodirectaccountoftheprofitabilityoftherevenuesgenerated
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