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14. Financial Statement Analysis

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Ratios: Total Asset Turnover

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Alright let's discuss a ratio the total asset turnover. So total asset turnover. It's gonna relate the amount of net sales. So this is our top line on our income statement, right? The sales up there at the top of our income statement and to our average total assets. Okay. So like all turnover ratios, this is a measurement of our efficiency. Okay. How efficiently are we using our assets and in this case how are we efficiently turning those assets into more sales? Alright. So let's see how we calculate this. Like most ratios. We've got a division here. Right? Look at our numerator, we've got net sales in our numerator. We're dividing by average total assets. Remember every time we're dealing with this average average total assets? Well we're gonna have the beginning balance, the ending balance divided by two. That's how we always calculate these all average balances. Beginning balance plus ending balance Divided by two. Okay. And usually when I do a calculation of of an average balance in a ratio like this, it's the first thing I like to calculate because then we're gonna be dealing with some weird orders of operation stuff if we start trying to do it all at once. So I just like to calculate that have my denominator ready and then calculate the ratio. So how do we analyze a total asset turnover? Well look remember it's how much of the numerator for each one of the denominator. So it tells us how many dollars of sales we earn for each dollar of total assets owned, right? So the idea is we're gonna have this amount of assets and we want to turn them into sales, right? We're trying to get as much sales as we can from our level of assets. So you can imagine that the higher the ratio is the better, right? We want to get as much sales from this level of assets. And you can imagine that when we look at this comparison here, it's going to be different for different industries, right. Different industries are going to require different levels of assets, where we're gonna see industries like the airline industry, where they have to have a million dollar planes and they have tons of assets to create their revenue compared to different industries. Where assets might not be as large of an amount. So you want to use benchmarking when you're comparing your total asset turnover. You want to look at competitors, you want to look at the industry average for your industry and see how you compare in those situations, right? So like I said, higher turnover ratios, the higher this ratio gets, it implies that you're more efficiently using your assets, right? You're getting more sales per dollar of assets. The higher this ratio gets cool. So this isn't too complicated of ratio net sales divided by average total assets. Why don't we go ahead and just jump right into some practice problems? You guys try and calculate these ratios. Alright, let's do that now. Yeah

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Problem

XYZ Company had net sales of $500,000 and COGS of $320,000. If the beginning balance of Total Assets was $300,000 and the ending balance in Total Assets was $400,000, what is the Total Asset Turnover ratio?

A

0.51

B

1.25

C

1.43

D

1.67

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Problem

ABC Company had $200,000 in Net Sales and Gross Profit of $80,000. If Total Assets equaled $400,000, what is the Total Asset Turnover ratio?

A

0.2

B

0.5

C

2.0

D

2.5

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