There are times when investors may be more concerned with the speed at which a business converts its assets into revenue. ROE = Profit Margin(RevenueNet Income) × Asset Turnover(AARevenue) × Financial Leverage(AEAA) The initial step in this method breaks down a company’s return on investment into three parts: asset turnover, profit margin, and financial leverage. This analysis was originally used in the 1920s as a way to analyze DuPont’s extensive business interests. The asset turnover ratio makes up an important part of the DuPont analysis. It would not be useful to compare Dominion Energy or Duke Energy to either Albertsons or Krogers since they are in different sectors. 66, which is also typical for a utility company.Īlthough by comparing the asset turnover ratio of Dominion Energy to Duke Energy, which is in the same sector, it does appear that Duke Energy is using company assets more efficiently. 03, which is not unusual for utility companies as they often have asset turnover ratios of less than one.ĭuke Energy is another utility company and has an asset turnover ratio of. Utility companies have large asset bases and therefore tend to have low asset turnover ratios.ĭominion Energy has an asset turnover ratio of. We will also look at two utility companies. Krogers has an asset turnover ratio of 2.8, which is within the average range for a grocery store.īut, since Krogers has a higher asset turnover ratio than Albertsons, Krogers is doing a better job of generating revenue from its assets. This is a typical asset turnover ratio for a grocery store. This means that Albertsons has sales of $2.46 for every dollar it has in assets. Retail businesses tend to have small asset bases and higher asset turnover ratios.Īlbertsons has an asset turnover ratio of 2.46. The first company we look at will be Albertsons.Īlbertsons is a large grocery store chain and is part of the retail sector. We will now compute the asset turnover ratio for several different companies, two are part of the retail sector, and two are in the utility sector. This ratio only provides relevant information when used to compare businesses in the same industry. Such a comparison would not help an investor in evaluating a company. In contrast, utility firms have a large asset base, thus giving them a lower asset turnover ratio.ĭue to the fact that this ratio does vary a lot from one sector to another, it is best not to compare the ratios of companies in different industries. If the ratio is high, it means the business is likely performing well because the high ratio shows that the business is doing a good job of using its assets to generate revenue or sales.Īlthough, it is important to consider that this ratio is typically higher in some sectors as compared to others.įor example, retail companies tend to have a high volume of sales and a reasonably small asset base, which gives them a high asset turnover ratio. Generally, a company will compute this ratio yearly. Divide the net sales by the average total assets. This will be listed on the business’s income statement.
Find the company’s total sales or revenue.Add these two values together and then divide them by two to get the average value of the company’s assets.
Then find the balance of the company’s assets as of the fiscal year’s end. Find the balance of the company’s assets at the beginning of the year on the company’s balance sheet.
The asset turnover ratio compares the revenue or sales of a company to its asset base.
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