Total asset turnover ratio PDF

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Q3 Total asset turnover ratio...

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QUESTION 3: Analyze the ability of management to manage their fixed assets and total assets for each of the two companies in 2019 as compared to 2018. Use two Asset Management efficiency ratios to support your answer and explain any change in each companies’ ability to use their assets to generate sales. Note: ensure that you analyse in this question, not just describe the ratio values. (2 marks)

Total asset turnover = Sales/Total assets CEN 2018 =

1,974,685,866 4,871,136,384

= 0.4053 or 0.41 times

2019 =

2,337,029,248 4,735,232,269

= 0.4935 or 0.49 times

ZEN 2018 =

51,429,000 96,418,000

2019 =

55,037,000 179,395,000

= 0.5333 or 0.53 times

= 0.3067 or 0.31 times

CEN’s total asset turnover ratio in 2018 was 0.41 times, which means for every $1 of assets $0.41 was generated. However, the sales per dollar of assets rose to $0.49 in year 2019, indicating that in year 2019 CEN made better use of its assets as compared to last year. The improvement in this ratio can be attributed to an 18.34% increase in sales revenue and slight decrease of 2.78% in total assets. ZEN generated $0.53 of sales for every $1 of total assets in year 2018, as indicated by a total asset turnover ratio of 0.53 times. However, there was a gradual decline in turnover ratio in 2019, falling to just 0.31 times. A massive increase of 86.05% in assets but just a slight increase of 7.01% in sales seems to be the reason for this huge decline in asset turnover ratio. This indicated that the efficiency of the company to use its assets to produce sales has declined over the year.

Fixed asset turnover = sales/net property, plant, and equipment CEN

2018 =

1,974,685,866 3,900,761,258

= 0.5062 or 0.51 times

2019 =

2,337,029,248 3,943,796,597

= 0.5925 or 0.59 times

ZEN 2018 =

51,429,000 75,944,000

2019 =

55,037,000 148,146,000

= 0.6771 or 0.68 times

= 0.3715 or 0.37 times

CEN’s fixed asset turnover ratio was 0.51 times in 2018, implying $0.51 was generated for every $1 of fixed assets. However, it increased to 0.59 in year 2019, generating $0.59 for every $1 of fixed assets. The increase in fixed ratio can be accounted by an 18.34% increase in sales, even after having a 1.10% increase in assets. This increase in ratio shows that CEN’s efficiency to generate profit through assets is increasing. ZEN had a fixed asset turnover ratio of 0.68 in year 2018, However, there was a huge decrease of around 45%, leaving it at only 0.37 in year 2019. The data indicates that the management of fixed assets to generate sales has deteriorated over the years. The fall in fixed ratio was caused by a huge increase in fixed assets/ppe by 95.07% while there was only a slight increase of 7.01% in sales. ZEN’s ratio indicates it is losing efficiency to use its assets to generate revenues....