Acca financial Accounting (FA) Study Text ac ca (FA)

 

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Chapter 20 

KAPLAN PUBLISHING

 

385 

5 

Net asset turnover 

Net asset turnover 

The 

net asset turnover

 is: 

Sales revenue

Capital employed (net assets)

 = times pa 

It measures management’s efficiency in generating revenue from the net assets 

at its disposal. This is similar to ROCE but in this case we measure the amount 

of sales revenue generated for every $1 capital invested in the business. 

Generally speaking, the higher the ratio the more efficient the business is. 

 

 

Further explanation of net asset turnover 

 

Note that this can be further subdivided into: 

•

 

non-current asset turnover (by making non-current assets the 

denominator) and 

•

 

working capital turnover (by making net current assets the 

denominator). 

Be aware that both ROCE and asset turnover can be significantly 

affected by a change in the business structure. For example, imagine that 

a manufacturing entity buys a significant amount of property and plant in 

a year with the aim to increasing production and therefore sales. The 

short term affect is that ROCE and asset turnover will initially fall but this 

does not mean the business is actually performing any worse. It may 

even be an indication of future gains. 

The reason is that the capital balance (net assets) will increase in 

comparison to the steady sales figures of the business. It cannot be 

expected that a business can buy new assets and simply grow 

immediately. It would take a number of years for a business entity to grow 

into its new assets and increase production until it operated at 100% 

capacity. Even if it could instantly use 100% of the new facilities it is 

unlikely that it will simply be able to sell all the new goods it produced 

instantly. The entity will need to find new customers, perhaps in new 

markets to be able to sell its goods. Of course, this does not take into 

account competitor responses! 

In summary, the increase in capital would be both significant and instant. 

The consequent improvement in performance would normally take longer 

to achieve and would most likely be spread over a number of years. Both 

ROCE and asset turnover would fall instantly and then start to improve 

each year as revenues start to grow.