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Calculating Asset Turnover
The asset turnover ratio calculates the total sales [revenue] for every dollar of assets a company owns. To calculate asset turnover, take the total revenue and divide it by the average assets for the period studied. [Note: you should know how to do this. In lesson 3 we took the average inventory and receivables for certain equations. The process is the same; take the beginning assets and average them with the ending assets. If XYZ had $1 in assets in 2000 and $10 in assets in 2001, the average asset value for the period is $5 because $1+$10 divided by 2 = $5]. A quick exercise would benefit your understanding.
Asset Turnover:
Total Revenue
---------(divided by) ---------
Average assets for period
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Alcoa
2001 Income Statement Excerpt |
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Period Ending: |
Dec 31, 2001 |
Dec 31, 2000 |
Dec 31, 1999 |
| Total Revenue |
$22,859,000,000 |
$23,090,000,000 |
$16,447,000,000 |
| Cost of Revenue |
$17,857,000,000 |
$17,342,000,000 |
$12,536,000,000 |
| Gross Profit |
$5,002,000,000 |
$5,748,000,000 |
$3,911,000,000 |
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Alcoa
2001 Balance Sheet Excerpt |
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|
2001 |
2000 |
1999 |
| Long Term Assets |
|
|
|
| Long Term Investments |
$1,428,000,000 |
$1,072,000,000 |
$673,000,000 |
| Property, Plant and Equipment |
$11,982,000,000 |
$14,323,000,000 |
$9,133,000,000 |
| Goodwill |
$9,133,000,000 |
$6,003,000,000 |
$1,328,000,000 |
| Intangible Assets |
$674,000,000 |
$821,000,000 |
$117,000,000 |
| Accumulated Amortization |
N/A |
N/A |
N/A |
| Other Assets |
N/A |
N/A |
N/A |
| Deferred Long Term Asset Charges |
$1,746,000,000 |
$1,894,000,000 |
$1,015,000,000 |
| Total Assets |
$28,355,000,000 |
$31,691,000,000 |
$17,066,000,000 |
In 2001 and 2000, Alcoa [Aluminum Company of America] had $28,355,000,000 and $31,691,000,000 in assets respectively, meaning there were average assets of $30,023,000,000 [$28.355 billion + $31.691 billion divided by 2 = $30.023 billion]. In 2001, the company generated revenue of $22,859,000,000. When applied to the asset turn formula, we find that Alcoa had a turn rate of .76138. That tells you that for every $1 in assets Alcoa owned during 2001, it sold $.76 worth of goods and services.
$22,859,000,000 revenue
---------(divided by) ---------
$30,023,000,000 average assets for period
There are several general rules that should be kept in mind when calculating asset turnover. First, asset turnover is meant to measure a company's efficiency in using its assets. The higher the number, the better [although investors must be sure compare a business to its industry. It is fallacy to compare completely unrelated businesses.] The higher a company's asset turnover, the lower its profit margin tends to be [and visa versa].
Next page > Calculating Return on Assets - ROA> << back, 35, 36, 37, 38, 39, 40, Segment 2 >>
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