Question

What is the focus when evaluating Home Depot asset utilization ratios? This category of ratios evaluates how effectively the company is using its investment in assets to generate sales.

Answer 1

Asset utilization ratios:

Asset turnover ratio = (Net revenue / Average total asset) × 100

Return on assets = (Net income / Average total asset) × 100

Accounts receivable turnover = (Net credit sales / Average accounts receivable) × 100

Inventory turnover ratio = (cost of goods sold / Average inventory) × 100

All these are the ratios of asset utilization. Numerator in each case indicates performance and denominator in each case indicates assets.

Focus: Performance should be always high, so that it gives higher ratio. Higher ratio indicates better efficiency in performance. Therefore, the focus is to see how the company is performing – whether it is efficient or inefficient.

Company H.D:

February 2018 to April 2018: Net revenue = $24,946 million, Average assets = $45,000 million

Asset turnover ratio = (Net revenue / Average total asset) × 100

                                    = ($24,946 / $45,000) × 100

                                    = 55.44%

Asset utilization is good here (efficient), since it crosses 50% mark.