## Asset Management Ratios

After reading this section, you will have been exposed to the different types of asset management ratios, their formulas, how to compute them, and which financial statements contain the information needed to calculate the ratios. You will also learn how to interpret the ratios and apply those interpretations to understanding the firm's activities.

Total asset turnover is a financial ratio that measures the efficiency of a company's use of its assets in generating sales revenue.

#### LEARNING OBJECTIVE

• Calculate the total assets turnover ratio for a business

#### KEY POINTS

• Total assets turnover = Net sales revenue / Average total assets.
• Net sales are operating revenues earned by a company for selling its products or rendering its services.
• Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset.
• Companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover.

#### TERM

• profit margins

Profit margin, net margin, net profit margin or net profit ratio all refer to a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue.

#### EXAMPLE

• Examples of intangible assets are goodwill, copyrights, trademarks, patents, computer programs, and financial assets, including such items as accounts receivable, bonds and stocks.

#### Total Assets Turnover

This is a financial ratio that measures the efficiency of a company's use of its assets in generating sales revenue or sales income to the company.

Asset turnover measures the efficiency of a company's use of its assets in generating sales revenue or sales income to the company.

Companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover. Companies in the retail industry tend to have a very high turnover ratio due mainly to cut-throat and competitive pricing.

Total assets turnover = Net sales revenue / Average total assets

• "Sales" is the value of "Net Sales" or "Sales" from the company's income statement".
• Average Total Assets" is the average of the values of "Total assets" from the company's balance sheet in the beginning and the end of the fiscal period. It is calculated by adding up the assets at the beginning of the period and the assets at the end of the period, then dividing that number by two.

#### Net Sales

• In bookkeeping, accounting, and finance, Net sales are operating revenues earned by a company for selling its products or rendering its services. Also referred to as revenue, they are reported directly on the income statement as Sales or Net sales.
• In financial ratios that use income statement sales values, "sales" refers to net sales, not gross sales. Sales are the unique transactions that occur in professional selling or during marketing initiatives.

#### Total Assets

In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value, and that is held to have positive economic value, is considered an asset. Simply stated, assets represent value of ownership that can be converted into cash (although cash itself is also considered an asset).

The balance sheet of a firm records the monetary value of the assets owned by the firm. It is money and other valuables belonging to an individual or business.

Two major asset classes are tangible assets and intangible assets.

• Tangible assets contain various sub classes, including current assets and fixed assets. Current assets include inventory, while fixed assets include such items as buildings and equipment.
• Intangible assets are non-physical resources and rights that have a value to the firm because they give the firm some kind of advantage in the market place.