6. Activity: Asset Turnover

The last important activity measure we want to consider is the firm's Asset Turnover Ratio. It is a general indicator for how capital intense the business is and for how efficient the firm is at deploying its assets in generating sales.

  • A high asset turnover ratio implies that a firm nees fewer assets to generate a dollar of revenues. It is therefore a measure of higher efficiency.
  • In contrast, a low asset turnover ratio implies that a firm needs more assets to generate a dollar of revenues. Therefore, it indicates that the firm manages its assets relatively inefficiently.

 

The most popular version of the Asset Turnover Ratio is the firm's Sales-to-Assets Ratio:

 

Asset Turnover = \( \frac{Sales}{\text{Average assets}} \).

 

Turning again to Hershey's financials in 2015, we know from the firm's balance sheets and income statement (in millions of USD):

  • Sales in 2015: 7'386.6
  • Total assets beginning of 2015 (end of 2014): 5'622.9
  • Total assets end of 2015: 5'344.4

 

The numbers imply that Hershey's average assets during 2015 were 5'583.7:

 

Average assets = \( \frac{Assets_{2014} + Assets_{2015} }{2} = \frac{5'622.9+5'344.4}{2} \)= 5'583.7.

 

Hence, the firm's asset turnover was 1.35:

 

Inventory turnover = \( \frac{Sales}{\text{Average assets}} = \frac{7'386.6}{5'583.7} \) = 1.35.

  

Put differently, for each dollar of average assets, the firm managed to generate revenues of 1.35 dollars.