Total Asset Turnover Examples
If you look around the web and read books there are a number of ways to calculate the total asset turnover. Funny how a formula which is supposed to be so simple, becomes a bit complicated. We are going to cover two common methods for performing this calculation. The first method is simply sales/total assets. This basically tells you how much money you are making relative to the amount of assets on hand. The second method is taking the sales divided by the average of the total assets over the past 2 years.
Example #1 - Apple's Total Asset Turnover (sales/total assets)
If you are looking to calculate a company's total asset turnover you are going to need two things: (1) income statement and (2) balance sheet. The income statement will provide information regarding a company's sales and the balance sheet will contain the total assets figure.
Below is the income statement for Apple. Can you tell me what the sales were for FY2010?
You guys are sharp; FY10 sales were 65,225,000. So, now we have our first number in order to calculate the total asset turnover ratio.
Below is the balance sheet for Apple. Can you tell me what the total assets are for FY2010?
All of you that guessed 75,183,000 are correct. Remember, assets include all of the cash on hand, but also machinery, buildings and the very ambiguous "intangibles".
Now that we know both the sales and total assets, let's calculate the total asset turnover for FY2010.
Remember, total assets turnover = (sales/total assets)
total asset turnover = 65,225,000/75,183,000 = .86
Example # 2 - Apple's Total Asset Turnover (sales/average total assets)
In the next example, we will cover calculating the total asset turnover when using the average of the last two years as the total assets input. So, based on our previous example, we know the sales revenue for FY10 is 65,225,000. Now let's determine the average total assets for FY2010 and FY2009. Below is a snapshot of Apple's balance sheet for FY2010 and FY2009. Can you determine what the average total assets were over this period?
To determine the average, we add 75,183,000 and 47,501,000 to arrive at 122,684,000. We then divide this number by two to get an average total assets figure of 61,342,000. We then take our sales figure of 65,225,000/61,342,000 to get a total assets turnover ratio of 1.06.
In summary what have we learned from the above examples? Well, I will tell you what I have learned; make sure you understand how someone is calculating their total asset turnover. If you look at our two examples, Apple went from holding more assets then it was selling in dollars, to making 6% more in sells than it holds in assets.