![]() ![]() ![]() Coca Cola Company on the other hand utilized $1.72 of assets to generate $1 of revenue. It used only $1.06 dollars per $1 of revenue. PepsiCo seems to be using its assets more efficiently. Compare capital intensity of both the companies and conclude which one is more efficient using this single metric.Ĭoca Cola Company's capital intensity ratio PepsiCo's total asset turnover ratio for equivalent period was 0.94. Total assets at the end of the period were $79,974 million. ![]() $$ \text $$ ExampleĬoca Cola Company (NYSE: KO) earned $46,542 million in financial year 2011-2012. FormulaĬapital intensity ratio equals total assets divided by sales: However, for companies in the same industry and following similar business model and production processes, the company with lower capital intensity is better because it generates more revenue using less assets. A high capital intensity ratio may be due to lower utilization of the company's assets or it may be because the company's business is more capital intensive and less labor intensive (for example, because it is automated). It is reciprocal of total asset turnover ratio.Ī high capital intensity ratio for a company means that the company needs more assets than a company with lower ratio to generate equal amount of sales. It is calculated by dividing total assets of a company by its sales. What doesn’t make sense is to have the decision made on the basis of a bonus payment.Capital intensity ratio of a company is a measure of the amount of capital needed per dollar of revenue. Based on the given figures, the fixed asset turnover ratio for the year is 9.51, meaning that for every one dollar. Its net fixed assets’ beginning balance was 1M, while the year-end balance amounts to 1.1M. Leasing may or may not make strategic sense for any individual enterprise. Fisher Company has annual gross sales of 10M in the year 2015, with sales returns and allowances of 10,000. ![]() Some companies pay bonuses pegged to this ratio, which gives managers an incentive to lease equipment rather than buy it. It is the gross sales from a specific period less. Thus, there is a mismatch between the time period covered in the numerator and denominator. The formula is: Asset Turnover Ratio Net Sales / Average Total Assets Net sales is the total amount of revenue retained by a company. Its apparent asset base will be that much lower and PPE turnover that much higher. Capital Turnover Ratio Sales Average Shareholders’ Equity Sales represent the top line of the income statement line, while inventory is found in the current assets section of the balance sheet. If a company leases much of its equipment rather than owning it, for instance, the leased assets may not show up on its balance sheet. So check the trend lines and the industry averages to see how your company stacks up.īut please note that sneaky little qualifier, “other things being equal.” The fact is, this is one ratio where the art of finance can affect the numbers dramatically. (Excerpts from Financial Intelligence, Chapter 24 – Efficiency Ratios)Ī company that generates a lower PPE turnover, other things being equal, isn’t using its assets as efficiently as a company with a higher one. This means we generated $4 in sales revenue for every $1 of PPE. If we have $8,000 in revenue this year and divide that by property plant and equipment investments worth $2,000, our PPE Turnover is: The formula for PPE Turnover is simply total revenue (from the income statement) divided by ending PPE (from the balance sheet): The higher our PPE Turnover, the more efficient we are with our capital investments. It’s a measure of how efficient you are at generating revenue from fixed assets such as buildings, vehicles, and machinery. This ratio tells you how many dollars of sales your company gets for each dollar invested in property, plant, and equipment (PPE). ![]()
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