Asset Turnover Ratios and QuickBooks 2012
Two different activity ratios can help manage your assets in QuickBooks 2012 — the fixed asset turnover ratio and the total assets turnover ratio. The fixed asset turnover ratio quantifies how efficiently a firm employs its fixed assets. Predictably, this financial ratio is most useful when a firm has a lot of fixed assets: real estate, equipment, and so forth.
The fixed asset turnover ratio uses the following formula:
sales/fixed assets
Assets | |
Cash | $25,000 |
Inventory | 25,000 |
Current assets | $50,000 |
Fixed assets (net) | 270,000 |
Total assets | $320,000 |
Liabilities | |
Accounts payable | $20,000 |
Loan payable | 100,000 |
Owner’s equity | |
S. Nelson, capital | 200,000 |
Total liabilities and owner’s equity | $320,000 |
Sales revenue | $150,000 |
Less: Cost of goods sold | 30,000 |
Gross margin | $120,000 |
Rent | 5,000 |
Wages | 50,000 |
Supplies | 5,000 |
Total operating expenses | 60,000 |
Operating income | 60,000 |
Interest expense | (10,000) |
Net income | $50,000 |
Based on the numbers supplied by the balance sheet shown and the income statement shown, you can calculate the following fixed asset turnover ratio:
$150,000/$270,000
This formula returns the value of 0.556. In a nutshell, this ratio says that this firm requires $270,000 of fixed assets to produce $150,000 of sales or, more specifically, that the firm produces sales equal to roughly 56 percent of its fixed assets.
As is the case with many of these financial ratios, no guideline exists that you can use to determine a good fixed asset turnover ratio. You compare your fixed asset turnover ratio with firms of a similar size in your industry.
The total assets turnover ratio also measures how efficiently you’re employing your assets. This ratio is probably more appropriate in the situation where a firm doesn’t have a lot of fixed assets, but the firm still wins or loses at the game of business based on how well the firm manages its assets.
The total assets turnover ratio formula is as follows:
sales/total assets
Here’s the formula that calculates the ratio by using the financial data from the tables. If the total sales equal $150,000 and the total assets equal $320,000, the following formula makes the calculation:
$150,000/$320,000
This formula returns the ratio of 0.469, which means that the firm generates sales equal to roughly 47 percent of its total assets.
The total assets turnover ratio that you calculate for your business can’t be compared with some external benchmark or standardized rule. You compare your ratio with the same ratio of similarly sized businesses in your industry.
Obviously, your main consideration is whether you’re efficiently using your assets to produce sales relative to your competitors. The more sales you can produce with a given level of assets, the better off your business is.