Example

Asset Turnover Ratios Moving away from specific accounts like inventory or receivables, we can consider several "big picture" ratios. For example, NWC turnover is:

NWC turnover

Sales NWC

13.8 times

This ratio measures how much "work" we get out of our working capital. Once again, assuming we aren't missing out on sales, a high value is preferred (why?). Similarly, fixed asset turnover is:

Fixed asset turnover

Sales

Net fixed assets $2,311

PricewaterhouseCoopers has a useful utility for extracting EDGAR data. Try it at edgarscan. pwcglobal.com.

80 times

With this ratio, it probably makes more sense to say that, for every dollar in fixed assets, Prufrock generated $.80 in sales.

Our final asset management ratio, the total asset turnover.; comes up quite a bit. We will see it later in this chapter and in the next chapter. As the name suggests, the total asset turnover is:

Sales

Total asset turnover

Total assets $2,311

.64 times

In other words, for every dollar in assets, Prufrock generated $.64 in sales.

To give an example of fixed and total asset turnover, based on recent financial statements, Delta Airlines had a total asset turnover of .76, as compared to 1.00 for IBM. However, the much higher investment in fixed assets in an airline is reflected in Delta's fixed asset turnover of .89, as compared to IBM's 1.99.

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

II. Financial Statements and Long-Term Financial Planning

3. Working with Financial Statements

© The McGraw-Hill Companies, 2002

PART TWO Financial Statements and Long-Term Financial Planning

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Responses

  • Luca
    Why is high nwc turnover preferred?
    8 years ago

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