Businesses and financial analysts calculate asset utilization to find out how efficient a business is with its assets.A ratio of asset value to revenues is the measurement.It is possible to calculate asset utilization for all of a business's assets at once or for individual categories of assets.It is easy to calculate asset utilization if you start with the right information.
Step 1: You can find the net sales information for the period.
Any sales or revenue figure can be used to calculate asset utilization.Net sales represent the total revenue collected over a period minus any discounts, returns, or allowances for damaged or missing products.Net sales are reported on a business's income statement.Net sales can be found by reducing gross sales by the total amount of returns, discounts, and damaged or missing goods.Determine a period where you want to measure asset utilization and record net sales in that period.A company might have $10,000,000 in sales for a year.They lost $200,000 on returns, discounts and damages, leaving them with $10,000,000 in net sales.
Step 2: Average total assets are calculated.
Average total assets is the total of assets held by the business over a period of time.The total assets can be added at the beginning of the period and then divided by two.Cash and cash equivalents, fixed assets, receivables, and others are included in total assets.The total assets should be stated on the balance sheets.Only assets directly used in production, such as plant equipment and property, can be included in an asset utilization analysis.The company in the previous example might have assets of $7,000,000 at the beginning of the year and $8,000,000 by the end of that year.Their average total assets are the sum of the two, divided by 2, which is $8,000,000.
Step 3: Put together your equation.
Simply, asset turnover is calculated.Net SalesAverage Total Assets is the formula for asset utilization.The formula calculates how many dollars of sales are created per dollar of assets held by the business.To calculate asset turnover, place your data for net sales and average total assets into the equation.This would be $10,000,000$8,000,000 for the company from the previous example.
Step 4: To get asset utilization you have to divide.
Divide net sales by average assets to solve the equation.The result will be a number.If a company had net sales of $10,000,000 and $8,000,000 in average assets, they would have an asset turnover of 10,000,000.
Step 5: Find your return on assets.
The other way to calculate asset utilization is asset turnover.Return on assets is a measure of the same performance metric.Net income is compared to total assets.Net income is the company's profit over the period.The following equation is used to calculate return on assets.
Step 6: The accounts receivable turnover can be calculated.
Accounts receivable turnover is a financial ratio that shows how effective a business is at collecting money.The formula accounts receivable turnover is used to calculate the ratio.Net credit sales are sales made on credit minus any discounts or allowances for damaged or lost goods.
Step 7: The average collection period is converted into your result.
You can easily find the average collection period after calculating accounts receivable turnover.This shows how long the amount stays in the accounts receivable account.The following formula is used to calculate this ratio.The business is susceptible to cash flow shortages if it has a long collection period.
Step 8: Determine inventory turnover.
If you look at how well a business manages its inventory, you can measure asset utilization.The inventory turnover can be calculated.The following formula is used to calculate this ratio.A business's income statement shows the cost of goods sold.The company stores inventory for a longer period of time if it has a small inventory turnover.Storage costs can increase and this can mean lost sales opportunities.
Step 9: The average age of inventory is found.
The average age of an item in inventory can be calculated using the following formula.This is another way of looking at inventory turnover.Similar to all other ratios, this one can be compared to its historical values over time for the business or to the same ratio for a competing business.
Step 10: Analyze your results.
Assets utilization is a measure of how well a business is able to use their assets to make money.A high ratio indicates that the company is efficient in using their assets, while a low one indicates poor asset management.How high an asset utilization ratio should be depends on the stage of the business.A low asset utilization ratio is indicative of over-investment.
Step 11: Compare the result to that of competitors.
The performance of one business or company can be compared to that of a competitor or the industry average.An accurate comparison of asset turnover for businesses in different industries is not possible because of operational differences.Look for industry asset turnover averages in industry publications or use financial statements from a competing company to get figures that you can compare to.The average asset turnover is different between industries.Financial and utilities companies may be close to zero.
Step 12: Over time.
The asset turnover of a business can be compared to its historical turnover ratios.Efforts to increase efficiency or economies of scale should lead to an increase in asset turnover ratio.Evaluate asset turnover over several different periods to see if it is increasing or decreasing for the business in question.
Step 13: As part of a broader analysis, use asset utilization.
It is not enough to just use asset utilization to assess business performance.To determine how well the business is being managed, you need to combine asset utilization with other measures.You can combine asset utilization measures with profit margin and leverage ratios to get a better idea of the business's performance.