Asset Turnover Ratios and QuickBooks 2014 - dummies

Asset Turnover Ratios and QuickBooks 2014

By Stephen L. Nelson

In QuickBooks, you should keep track of a couple of asset turnover ratios. The fixed-asset turnover ratio quantifies how efficiently a firm employs its fixed assets. The total assets turnover ratio also measures how efficiently you’re employing your assets.

Fixed-asset turnover ratio

Predictably, the fixed-asset turnover 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

Based on the numbers supplied by the balance sheet and the income statement shown, you can calculate the following fixed-asset turnover ratio:

$150,000/$270,000

A Simple Balance Sheet
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
A Simple Income Statement
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

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 those of firms of a similar size in your industry.

Total assets turnover ratio

This ratio is probably more appropriate for a firm that doesn’t have a lot of fixed assets but still wins or loses at the game of business based on how well it manages its assets.

The total assets turnover ratio formula is as follows:

sales/total assets

Here’s a formula that calculates the ratio by using the financial data from the balance sheet and income statement shown. 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 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 similar-size businesses in your industry.

Obviously, your main consideration is whether you’re efficiently using your assets to produce sales relative to those of your competitors. The more sales you can produce with a given level of assets, the better off your business is.