How to Use Financial Reports to Track Total Asset Turnover
You can look at how well a company manages its assets overall by using financial reports to calculate its total asset turnover. Instead of just looking at inventories or fixed assets, the total asset turnover measures how efficiently a company uses all its assets.
How to calculate total asset turnover
Here's the formula for calculating total asset turnover:
Net sales ÷ Total assets = Total asset turnover
You can use information from Mattel's and Hasbro's income statements and balance sheets to show you how to calculate total asset turnover. You can find the net sales at the top of the income statement and the total assets at the bottom of the assets section on the balance sheet. Here are the calculations:
$6,420,881,000 (Net sales) ÷ $6,526,785,000 (Total assets) = 0.98 Total asset turnover
$4,088,983,000 (Net sales) ÷ $3,237,063,000 (Total assets) = 0.95 Total asset turnover
What do the numbers mean?
Mattel and Hasbro have similar asset ratios, so their efficiency in using their total assets to generate revenue is about equal. Both companies hold more than half their assets in current assets, which means that they're relatively liquid and can respond quickly to industry changes.
A higher asset turnover ratio means that a company is likely to have a higher return on its assets, which some investors believe can compensate if the company has a low profit ratio. By compensate, this means that the higher return on assets could mean increased valuation for the company and, therefore, a higher stock price.
In addition to looking at this ratio, when determining stock value, you need to calculate the profit ratios and return on assets. Aside from inventory turnover, another key asset to consider is accounts receivable turnover.