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Is a total asset turnover of 1.56 good or bad.  The initial analysis should include the following: The ratio equation Use the result in a sentence; i.e. For every dollar invested in assets the company is earning 22.4 cents or 22.4% in net income.  Then explain whether this is a good result or a result that needs improving.

Is a total asset turnover of 1.56 good or bad.  The initial analysis should include the following: The ratio equation Use the result in a sentence; i.e. For every dollar invested in assets the company is earning 22.4 cents or 22.4% in net income.  Then explain whether this is a good result or a result that needs improving.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Is a total asset turnover of 1.56 good or bad. 

The initial analysis should include the following:

  • The ratio equation
  • Use the result in a sentence; i.e. For every dollar invested in assets the company is earning 22.4 cents or 22.4% in net income. 
  • Then explain whether this is a good result or a result that needs improving.
  • The original post should include at least three (3) sentences but no more than seven (7) sentences.
Total Asset Turnover One important measure of a company's ability to use its assets efficiently and effectively is total asset tur nover, defined in O Exhibit 10.18. EXHIBIT 10.18 Total Asset Turnover Net sales Average total assets Total asset turnover = A1 Compute total asset turn- over and apply it to analyze a company's use of assets. Net sales is net amounts earned from the sale of products and services. Average total assets is (Current period-end total assets + Prior period-end total assets)/2. A higher total asset turnover means a company is generating more net sales for each dollar of assets. Management is evaluated on efficient and effective use of total assets by looking at total asset turnover. Let's look at total asset turnover in Exhibit 10.19 for two competing companies: Starbucks and Jack in the Box.
Transcribed Image Text:Total Asset Turnover One important measure of a company's ability to use its assets efficiently and effectively is total asset tur nover, defined in O Exhibit 10.18. EXHIBIT 10.18 Total Asset Turnover Net sales Average total assets Total asset turnover = A1 Compute total asset turn- over and apply it to analyze a company's use of assets. Net sales is net amounts earned from the sale of products and services. Average total assets is (Current period-end total assets + Prior period-end total assets)/2. A higher total asset turnover means a company is generating more net sales for each dollar of assets. Management is evaluated on efficient and effective use of total assets by looking at total asset turnover. Let's look at total asset turnover in Exhibit 10.19 for two competing companies: Starbucks and Jack in the Box.
EXHIBIT 10.19 Analysis Using Total Asset Turnover Company Figure ($ millions) Current Year 1Year Ago 2 Years Ago Starbucks Net sales $22,387 $21,316 $19,163 Average total assets $14,339 $13,364 $11,585 Total asset turnover 1.56 1.60 1.65 Jack in the Box Net sales $1,554 $1,599 $1,540 Average total assets $1,289 $1,326 $1,287 Total asset turnover 1.21 1.21 1.20 To show how we use total asset turnover, let's look at Starbucks. We express Starbucks's use of assets in generating net sales by saying "it turned its assets over 1.56 times during the current year." This means that each $1.00 of assets produced $1.56 of net sales. Is a total asset turnover of 1.56 good or bad? All companies want a high total asset turnover. Interpreting the total asset turnover requires an understanding of company operations. Some operations are capital- intensive, meaning that a relatively large amount is invested in plant assets to generate sales. This results in a lower total asset turnover. Other companies' operations are labor-intensive, meaning that they generate sales using people instead of assets. In that case, we expect a higher total asset turnover. Starbucks's turnover is higher than that for Jack in the Box. However, Starbucks's total asset turnover decreased over the last three years. To maintain a strong total asset turnover, Starbucks must grow sales at a rate equal to, or higher than, its total asset growth.
Transcribed Image Text:EXHIBIT 10.19 Analysis Using Total Asset Turnover Company Figure ($ millions) Current Year 1Year Ago 2 Years Ago Starbucks Net sales $22,387 $21,316 $19,163 Average total assets $14,339 $13,364 $11,585 Total asset turnover 1.56 1.60 1.65 Jack in the Box Net sales $1,554 $1,599 $1,540 Average total assets $1,289 $1,326 $1,287 Total asset turnover 1.21 1.21 1.20 To show how we use total asset turnover, let's look at Starbucks. We express Starbucks's use of assets in generating net sales by saying "it turned its assets over 1.56 times during the current year." This means that each $1.00 of assets produced $1.56 of net sales. Is a total asset turnover of 1.56 good or bad? All companies want a high total asset turnover. Interpreting the total asset turnover requires an understanding of company operations. Some operations are capital- intensive, meaning that a relatively large amount is invested in plant assets to generate sales. This results in a lower total asset turnover. Other companies' operations are labor-intensive, meaning that they generate sales using people instead of assets. In that case, we expect a higher total asset turnover. Starbucks's turnover is higher than that for Jack in the Box. However, Starbucks's total asset turnover decreased over the last three years. To maintain a strong total asset turnover, Starbucks must grow sales at a rate equal to, or higher than, its total asset growth.
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