Fixed Asset Turnover: Advanced 1

We can investigate a little bit further, though, as we did with the total asset turnover ratio before we can make our final assessment. However, we need to look at which of the fixed assets have increased so much in case it's not as simple as it might look:

Carphone Warehouse Consolidated Balance Sheet	31 March 2001	25 March 2000
Fixed assets	£'000	£'000
Intangible Assets	231,471	26,933
Tangible assets	120,278	63,190
Investments	44,426	11,584
Total Fixed Assets	396,175	100,279

Whilst tangible fixed assets such as land, buildings, machinery and so on have doubled and investments have quadrupled, the largest increase of all is in intangible assets. The notes to the financial statements in the Carphone Warehouse's annual report shows us that the majority of the intangible asset came from the goodwill arising from having bought the rest of the shares in a business in which it already had a 76% holding in. Here are those notes:

Intangible fixed assets: goodwill ... extract
Group	£'000
Cost
At 25 March 2000	27,167
Acquisition of minority interests in the Group (see note 12a)	169,050
Other acquisitions	42,580
Amounts written off ...	1,776
Foreign exchange	340
At 31 March 2001	240,913
Net book value
At 31 March 2001	231,471
At 25 March 2000	26,933

Acquisition of minority interests in the Group
On 22 June 2000, the Company acquired 24% of the issued share capital of The Phone House Holdings (UK) Limited, a company registered England in which it already had a 76% interest, in exchange for 81.9m shares in the Company. The shares in the Company had a fair value of £104.1m, giving rise to goodwill on acquisition of £105.9m. On 14 July 2000, the Company acquired all minority interests in The Phone House SA (France), Phone Warehouse SL (Spain) and Polirent Comercio e Aluguer de Bens e Servicos LDA (Portugal), in exchange for 31.3m shares in the Company. The shares in the Company had a fair value of £62.5m, giving rise to goodwill on acquisition of £63.1m.

The Carphone Warehouse's accounting policy on goodwill is:

Intangible assets - goodwill
Goodwill arising on the acquisition of subsidiary undertakings and businesses, representing any excess of the fair value of the consideration given over the fair value of the identifiable assets and liabilities acquired, is capitalised and written off on a straight line basis over its useful economic life of 20 years.

Source: Carphone Warehouse Annual Report - page 30 [PDF]

Let's adjust for the goodwill. For 2001 let's take out all £169,050,000 of it and see the impact that has on the fixed asset turnover ratio.

Adjusted Fixed Asset Turnover Ratio for the Carphone Warehouse
31 March 2001	1,110,678 396,175 - 169,050	4.89 times
25 March 2000	697,720 100,279	6.96 times

Good, now the change is not so dramatic - it has fallen by only 30% now. Still fixed assets have changed at a quicker rate than turnover so we are still looking for improvements next year.

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