Financial Formula

10. Why is the operating return on assets ratio also referred to as the operating return on investment?

The fixed-asset turnover: This ratio measures a company's ability to generate net sales from fixed-asset investments

The value of fixed assets typically decreases over time. The amount of the decrease each year is accounted for and is called depreciation. Depreciation for the year is expensed on the income statement and added to the accumulated depreciation account on the balance sheet. So the value of the fixed assets on the balance sheet is reduced by the accumulated depreciation.

The decline of inventory turnover presents the incresed possibility of inventory obsolescence which is likely to be assessed as higher business risk. In debts to equity part, the ratio in current year is much higher than that of preceeding year, which means the extent of use of debt in financing company is much higher than before. Pinnacle has used most of its borrowing capacity and has little cushion for addional debt.This action brought high business risk to Pinnacle. In addition, Pinnacle puchase more inventory in current year that that of preceeding year, and net sales are increasing also compared previous year. However, the net income is decreased significantly. These changes show expenses (maybe direct or indirect) have increased dramaticly. The company uses more expensive materials and labors to manufacure and sell products.

Asset turnover depicts investment efficiency, because it shows how many sales dollars are generated for every dollar invested in the company’s assets. Lowe’s had relatively lower asset turnover ratios than Home Depot because their recent investment in PP&E.

The inventory turnover ratio "measures the number of times on average the inventory sold during the period; computed by dividing cost of goods sold by the average inventory during the period" (Kimmel et al, 2007, p. 292). This indicates how quickly a company sells its goods and a high ratio "suggests that management is reducing the amount of inventory on hand, relative to sales" (Kimmel et al, 2007, p. 287).

Return on Assets shows the Company’s ability to generate a profit based on assets and equity. In 2009, the Company’s profit margin was 3.07% and in 2011 it had fallen to 1.91%.

Ratio analysis is a very useful tool when it comes to understanding the performance of the company. It highlights the strengths and the weaknesses of the company and pinpoints to the mangers and their subordinates as to which area of the company requires their attention be it prompt or gradual. The return on shareholder’s fund gives an estimate of the amount of profit available to be shared amongst the ordinary shareholders; where as the return on capital employed measures an organization 's profitability and the productivity with which its capital is utilized. Return on total assets is a profitability ratio that measures the net income created by total assets amid a period.

One of the five measurements of a financial ratio analysis is asset management, also known as turnover. Dess, et al. (2012) evaluates turnover by calculating the cost of goods sold over inventory (p. 497). Inventory turnover evaluates how a company can flip its product within a given time (Adkins, n.d.). The higher the turnover, the more “light inventory” a company has as Adkins (n.d.) explained. Turning over inventory, especially in the shoe retail industry, is imperative to keeping up with the competition and making a profit. Inventory turnover allows for the best price stability that, in turn, offers a better profit margin from selling at competitive prices. Customers want to see the newest arrivals, not the old products that everyone else has. For Footlocker and Finish Line, turning over the old with the new inventory can be costly and will jeopardize their clientele. Therefore, in comparing Finish Line to Foot Locker (Figure 3), Finish Line turns over inventory faster while it makes more use of its freed cash from its profit margin for other opportunities.

Historic cost depreciation is being used which leads to skewed numbers that misrepresent how well a product line will continue to operate in the future due to understated replacement value of fixed assets.

Return on assets ratio declined in 2010. This is due to increased total assets in 2010 due to company's acquisition of assets. In 2011, the company had a higher return on equity, which indicates that Lowe’s was able to generate more profit from the money that shareholder invested. The sales generated relative to total assets decreased in 2010, mainly due to reduced sales in 2009 coupled with increased total assets. Fixed asset turnover has been relatively good for Lowes. The ratio indicates how well the company is able to put fixed assets to use in generating sales. Current ratio has improved over past three years indicating a strong trend for the company in its ability to pay its current liabilities with current assets. The long-term debt forms a major part of company's financing. The company reviews its

Generally speaking, the shorter of the A/R turnover in days, the better efficiency of current capital. But the data of this firm is higher than the industry average level, it indicates there is an inefficient use of current capital and a problem of management, especially in 2001.But it started dropping dramatically in 2002 which reflects an obviously improvement of management.

Abbott’s fixed asset and total asset turnover ratios can tell us how well the firm uses its assets to generate revenue. The fixed asset ratio provides the proportion of sales to fixed assets and tells us how much revenue is

Another ratio we will look at is total asset turnover rate. Total asset turnover rate measures how efficiently a company uses its assets to generate sales. In 2001 the total asset turnover rate was 1.079 and in 2000 it was 1.193. The fixed asset turnover ratio is similar to the total asset turnover ratio but includes only fixed assets. The fixed asset turnover rate measures the capacity utilization and the quality of fixed assets and was 3.771 for 2001 and 3.854 for 2000.

Evaluating management effectiveness, the asset utilization ratios assess daily operating performance. Indicating a quicker collection turnover on outstanding debt, Google has a higher receivables turnover than Apple. Although, Google takes longer to collect accounts receivable, or average collection period, than Apple. Similarly, analysis reveals Google has double the higher inventory turnover than Apple. Comparing the fixed asset turnover reveals that Google gains 2.64 dollars for each dollar in fixed assets, whereas Apple generates 7.98 dollars. The total asset turnover tells that Apple outperformed Google by generating 67 cents for every dollar of assets.