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Total Assets Turnover (ratio)

In profitability ratios return on capital employed is the most comprehensive and meaningful ratio. But we have

observed (previously) that ROCE studied with margin and assets utilization ratios gives more insight regarding the changes in ROCE. Total Assets Turnover is one of the Assets Utilization Ratios that provides deep understanding of ROCE.

FORMULA

Total Assets Turnover  =

Sales


Average Total Assets

 

EXAMPLE

Sales figure can be extracted directly from face of Statement of Comprehensive Income.
Total Assets is the sum of Non Current and Current Assets both can be extracted from the face of Statement of Financial Position. Average figure ((opening + closing) / 2) is used to make balance sheet figure representative of whole year.

Total Assets Turnover  =

7,468,110


3,565,585 + 2,152,920

Total Assets Turnover  =

1.30 times per year

Data used in calculating ratio is extracted from Hypothetical Financial Statements. (See Hypothetical Financial Statements used in calculation).

 

MEASUREMENT UNIT

Total Assets Turnover (ratio) is measured in Times per year.
Using the above example, the ability with which company used its assets for generating $ 1 sales is 1.30 times per year.

 

INTERPRETATION


How to interpret the ratio


As we have already discussed ROCE should be studied with margin ratios and asset utilization ratios. Asset utilization ratios provide the information about management efficiency.

Assets include property, plant, equipment and other assets that are used to generate sales. The higher the ratio, the more efficient the management in utilizing assets for generating profits and vice versa.

Total assets include assets which do not directly take part in generating sales e.g. investments is the part of total assets but we know that investment can never take part in generating sales therefore for more accurate picture it is better to subtract all such assets (not taking part in generating profits) while calculating this ratio.

Total Assets Turnover although provides us some information however a better efficiency ratio might be Return on Assets.


Users’ needs addressed by the ratio


Shareholders are most common users of efficiency ratios as they have appointed the management and they might be interested to know the performance of the management. Efficiency ratios among other things are one of the ways to ascertain the management’s performance.

Management monitors the asset utilization ratios to control its performance since management is primarily responsible for using the assets of the company with great efficiency for generating sufficient profits. This ratio tells management where they are standing at the moment and what they should do to improve it.

(You must have an understanding of users’ needs of financial statements; please refer the topic 1- financial statement users for details).

 

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