Financial Accounting: An Integrated Statements Approach, 2nd Edition

Financial Utilization Analysis

Fixed assets can also be evaluated by their ability to generate revenue. One measure

of the revenue-generating efficiency of fixed assets is the fixed asset turnover ratio. The

fixed asset turnover ratiomeasures the number of dollars of revenue earned per dol-

lar of fixed assets and is calculated as follows:

Fixed Asset Turnover Ratio

Revenue

Average Book Value of Fixed Assets

To illustrate the calculation, the following fixed asset balance sheet information is

available for Marriott International, Inc.:

December 31, 2004 January 2, 2004

(in millions) (in millions)

Property and equipment (net) $2,389 $2,513

In addition, Marriott reported revenue of $10,099 million for 2004. Thus, the fixed as-

set turnover ratio is calculated as follows:

Fixed Asset Turnover Ratio

$10,099

= 4.12

($2,389$2,513)/2

For every dollar of fixed assets, Marriott earns $4.12 of revenue. The larger this ratio,

the more efficiently a business is using its fixed assets. This ratio can be compared

across time within a single firm or to other companies in the industry to evaluate over-

all fixed asset turnover performance. For example, the fixed asset turnover ratios for

Starwood Hotels & ResortsandChoice Hotelsare 0.76 and 8.4, respectively. Marriott

is operating its hotel assets at an efficiency level between that of Starwood and Choice.

Choice’s high fixed asset turnover ratio can be explained by its aggressive franchising

strategy, which allows it to earn revenues in the form of franchising fees without own-

ing hotel fixed assets.

Exhibit 12 shows the fixed asset turnover ratio for a number of different busi-

nesses. The smaller ratios are associated with companies that require large fixed asset

investments. The larger fixed asset turnover ratios are associated with firms that are

more labor-intensive and require smaller fixed asset investments.

418 Chapter 9 Fixed Assets and Intangible Assets

Company (industry) Fixed Asset Turnover Ratio

Comcast Corp.(cable) 1.00

Computer Associates International Inc.(consulting) 5.00

Google Inc.(Internet) 12.15

Manpower, Inc.(temporary employment) 65.15

Norfolk Southern Corporation(railroad) 0.35

Ruby Tuesday, Inc.(restaurant) 1.47

Southwest Airlines Co.(airline) 0.84

Exhibit 12

Fixed Asset Turnover

Ratios