Chapter 14 Financial Statement Analysis 645A common financial measure of fixed asset efficiency is the fixed asset turnover.
As in the other turnover measures, the fixed asset turnover measures the number of
dollars of sales that are generated from each dollar of average fixed assets during the
year. It is computed by dividing the net sales by the average fixed assets. If monthly
data are not available, the average of the net fixed assets at the beginning and end of
the year may be used. The fixed asset turnover for Pixar and DreamWorks is computed
as follows:For Pixar and DreamWorks, the fixed asset turnover measures how many dollars
of sales are being made from investments in property and equipment. Pixar is able to
generate $2.27 of revenue for each dollar invested in property and equipment, while
DreamWorks is able to generate $12.27 per dollar invested in property and equipment.
Again, this suggests that Pixar’s efficiency in using its assets is much less than
DreamWorks’.Asset Efficiency Summary
The asset efficiency of the three major asset categories can now be compared for the
two companies, as follows:Pixar DreamWorks
Total asset turnover 0.24 1.15
Accounts receivable turnover 1.91 4.16
Inventory turnover 0.24 1.20
Fixed asset turnover 2.27 12.27DreamWorks’ total asset turnover is stronger than Pixar’s because its accounts receivable,
inventory, and fixed asset turnovers are stronger. Pixar should work toward increasing
sales relative to the assets required to support those sales. This can be done through a
number of short- and long-term strategies, including adding advertising, producing more
films, earning revenue from character licenses, or improving film production methods.LEVERAGE ANALYSIS
As we explained in a previous section, the excess of the rate earned by stockholders’
equity over the rate earned on total assets is caused by leverage. Leverage measures the
amount of debt used by a firm to finance its assets. Pixar’s rate earned on stockholders’
equity of 13.1% is only 0.7 percentage points greater than its rate of 12.4% earned on
total assets, while DreamWorks’ 81.8% rate earned on stockholders’ equity is 46.4 per-
centage points higher than its rate of 35.4% earned on total assets.Pixar DreamWorks
(in millions, (in millions,
except ratio) except ratio)
a. Net sales $273.50 $1,078.20
Fixed assets (net):
Beginning of year $115.00 $ 89.80
End of year 125.60 86.00
Total $240.60 $ 175.80
b. Average (Total ÷ 2) $120.30 $ 87.90
Fixed asset turnover (a ÷ b) 2.27 12.27Determine and interpret
leverage.