Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 9 Fixed Assets and Intangible Assets 417

major types of analyses are operational utilization analysis and financial utilization

analysis.

Operational Utilization Analysis

The operating statistics of fixed assets for some fixed asset-intensive industries are pro-

vided by the reports filed with the SEC (Securities and Exchange Commission) and,

hence, are publicly available for analysis. These operational measures are typically

determined by the following general ratio:

Operational Utilization (general ratio)

Annual Usage of the Fixed Asset

Total Annual Fixed Asset Capacity

The closer the operational utilization approaches 100%, the more efficient the fixed as-

sets. Naturally, a 100% utilization would be rare; however, much smaller percentages

could indicate a problem. Exhibit 11 provides the ratio name and calculation for sev-

eral operational utilization ratios for a number of industries.

To illustrate, the occupancy rate reported to the SEC for Starwood Hotels &Resorts

(Sheraton®and Westin®hotel brands) was 68.5%. This percentage is determined by di-

viding the total room nights sold by the total available nights. The available nights are

the number of rooms multiplied by 365 operating days in the year. The comparable ra-

tio for Marriott International, Inc., was 71.8%. We could conclude that Marriott has

utilized its hotel assets more efficiently than Starwood because more room nights were

sold as a percent of available nights.

Industry Ratio Name Ratio Calculation

Airline Load factor Seat miles sold ÷ Available seat miles

Cable Penetration Subscribers ÷ Potential connections on

network

Hospital (operating room) Utilization Utilized hours ÷ Available hours

Hotel Occupancy Nights sold ÷ Available nights

Power generation Utilization Net generating output ÷ Total generating

capacity

Exhibit 11

Operational Utilization

Ratio Examples

Rent or Own?

HOW BUSINESSES MAKE MONEY

You might hire a copy shop to copy a school paper,
rather than acquiring a copy machine to make your
own copies. In the same way, companies must decide
which activities they should perform and which ac-
tivities they should hire other companies to perform
for them. The activities that are performed internally
usually require fixed assets. Fixed assets, in turn,
place a firm at risk, since these assets must be used
in order to have a financial return. Thus, some firms
limit internal activities to their core competencies, or
those activities that provide the company a strategic

comparative advantage. Under this philosophy, non-

core activities are purchased from others. Sara Lee

Corporationembraced this strategic philosophy by

becoming “an asset-less company.” That is, Sara Lee

has retained only its core activities and has asked sup-

pliers to perform its non-core activities, such as manu-

facturing. In contrast, General Mills, a Sara Lee

competitor, owns its manufacturing facilities. This dif-

ference in strategic philosophy can be seen in the com-

panies’ respective fixed asset turnover ratios, 6.0 for

Sara Lee and 3.6 for General Mills.