Financial Ratio Analysis - Total Asset Turnover
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...