CP 10-5 Fixed asset turnover: three industries
The following table shows the revenues and average net fixed assets for a recent fiscal year for three different companies from three different industries: retailing, manufacturing, and communications.
Revenues (in millions)
Average Net Fixed Assets (in millions) Wal-Mart $405,607 $96,335 Occidental Petroleum Corporation 15,403 32,856 Comcast Corporation 34,256 24,034
a. For each company, determine the fixed asset turnover ratio. Round to two decimal places.
b. Explain Wal-Mart’s ratio relative to the other two companies.
Answer:
a. Fixed Asset Turnover =
AssetsFixedofValueBookAverage Revenue
Wal-Mart: $96,335 $405,607
= 4.21
Occidental Petroleum: $32,856 $15,403
= 0.47
Comcast Corporation: $24,034 $34,256
= 1.43
b. The fixed asset turnover measures the amount of revenue earned per dollar of fixed assets. Wal-Mart earns $4.21 of revenue for every dollar of fixed assets, while Occidental earns $0.47 and Comcast Corporation earns $1.43 in revenue for every dollar of fixed assets. Occidental and Comcast require more fixed assets to operate their businesses than does Wal-Mart, for a given level of revenue volume.
Does this mean that Wal-Mart is a better company? Not necessarily. Revenue is not the same as earnings. More likely, Wal-Mart has a smaller profit margin than do Occidental and Comcast. Although not required by the exercise, the income from operations before tax as a percent of sales (operating margin) for the three companies is Occidental, 31.2%; Comcast, 14.3%; and Wal-Mart, 5.4%. Thus, the difference between the fixed asset turnovers seems reasonable. Generally, companies with very low fixed asset turnovers, such as gas and oil exploration and production (Occidental) and cable communications (Comcast), must be compensated with higher operating margins.
Revenues (in millions)
Average Net Fixed Assets (in millions) Wal-Mart $405,607 $96,335 Occidental Petroleum Corporation 15,403 32,856 Comcast Corporation 34,256 24,034
a. For each company, determine the fixed asset turnover ratio. Round to two decimal places.
b. Explain Wal-Mart’s ratio relative to the other two companies.
Answer:
a. Fixed Asset Turnover =
AssetsFixedofValueBookAverage Revenue
Wal-Mart: $96,335 $405,607
= 4.21
Occidental Petroleum: $32,856 $15,403
= 0.47
Comcast Corporation: $24,034 $34,256
= 1.43
b. The fixed asset turnover measures the amount of revenue earned per dollar of fixed assets. Wal-Mart earns $4.21 of revenue for every dollar of fixed assets, while Occidental earns $0.47 and Comcast Corporation earns $1.43 in revenue for every dollar of fixed assets. Occidental and Comcast require more fixed assets to operate their businesses than does Wal-Mart, for a given level of revenue volume.
Does this mean that Wal-Mart is a better company? Not necessarily. Revenue is not the same as earnings. More likely, Wal-Mart has a smaller profit margin than do Occidental and Comcast. Although not required by the exercise, the income from operations before tax as a percent of sales (operating margin) for the three companies is Occidental, 31.2%; Comcast, 14.3%; and Wal-Mart, 5.4%. Thus, the difference between the fixed asset turnovers seems reasonable. Generally, companies with very low fixed asset turnovers, such as gas and oil exploration and production (Occidental) and cable communications (Comcast), must be compensated with higher operating margins.
