Asset turnover

 

1) A retailer has net sales of $500,000, total assets of $1,000,000, and a net profit of $60,000. What is its asset turnover? Describe what asset turnover means using your answer as an example.

2) A retailer has these financial results: current assets, $500,000; fixed assets, $1,000,000; current liabilities, $520,000; fixed liabilities, $920,000; net sales, $8,000,000; and net profit, $120,000.

Calculate the following:
net profit margin
return on assets
financial leverage
return on net worth
3) Comment on the financial health of this retailer.

 

Sample Solution

The asset turnover ratio is a measurement that shows how efficiently a company is using its owned resources to generate revenue or sales. The ratio compares the company’s gross revenue to the average total number of assets to reveal how many sales were generated from every dollar of company assets. The higher the asset ratio, the more efficient the use of the company’s assets. Asset turnover can be calculated with this equation: Asset Turnover ratio = Total Revenue / Average Assets. Average assets are calculated by adding Beginning year assets to End of year assets and dividing the sum by two. Suppose company ABC had total revenue of $10 billion at the end of its fiscal year. Its total assets were $3 billion at the beginning of the fiscal year and $5 billion at the end. Assuming the company had no returns for the year, its net sales for the year was $10 billion.

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