Total Asset Turnover

The asset turnover ratio simply compares the turnover with the assets that the business has used to generate that turnover. In its simplest terms, we are just saying that for every £1 of assets, the turnover is £x. The formula for total asset turnover is:

Total Asset Turnover	=	Turnover
		Total Assets

As usual, we'll take a look at the Carphone Warehouse's total asset turnover ratios first, for practice, and then we'll try to work out what we've found. Here are the figures we need:

Carphone Warehouse Consolidated Profit and Loss Account	31 March 2001	25 March 2000
	£'000	£'000
Turnover	1,110,678	697,720
Total Fixed Assets	396,175	100,279
Total Current Assets	315,528	171,160

Total Asset Turnover Ratio for the Carphone Warehouse
31 March 2001	1,110,678 396,175 + 315,528	= 1.56 times
25 March 2000	697,720 100,279 + 171,160	= 2.57 times

We see the result of 1.56 times for 2001 ... this means that turnover is 1.56 times bigger than total assets. Another way of saying that is that the Carphone Warehouse was able to generate sales of £1.56 for every £1 of assets it owned and used for the year ended 31 March 2001. For the year ended 25 March 2000, it was even higher at 2.57 times.

The Total Asset turnover ratio has worsened a lot over the two years. If 2.57 times was good, then 1.56 times is definitely worse.

Can we see why this ratio fell so sharply? Actually, it's not as bad as it seems. Turnover increased by 59% but fixed assets increased by 295% and current assets by 84%. Here we have one of those cases where a ratio is falling in value but the underlying changes might not be so bad. That is, the Carphone Warehouse has made major investments in its assets that have yet to generate their previous level of sales: 1.56 times versus 2.57 times. However, we should say that we expect that next year this ratio should improve again.

Let's have some bad news, though. Over the four years to 2001, this is the Carphone Warehouse's Net Asset Turnover Ratio profile:

Net Asset Turnover Ratio	2001	2000	1999	1998
Net Asset Turnover	2.27	7.05	5.03	6.17

What are the signs telling us? Take a look at this graph:

The Carphone Warehouse is growing steadily in terms of turnover and its asset base. However, the very high net asset turnover ratio values came when the turnover and asset values were low, so mathematically this can often mean that the ratio is very likely to be high. So, it's not always bad when a ratio falls - it should recover, though, as the additional assets start to generate more sales and profit in the coming months.

Source:
http://www.bized.co.uk/