Question

Asset Turnover. In each case, choose the firm that you expect to have the higher asset turnover ratio. (Hint: think about the likely nature of each firm’s business model. For example, would the firm require a lot or a little capital? Would it strive for high sales or high profit margins?) a. Economics Consulting Group or Home Depot b. Catalog Shopping Network or Gucci c. Electric Utility Co. or Standard Supermarkets

Answer 1

Asset Turnover ratio = Net Sales/ Average Total Assets

a. Economics Consulting Group or Home Depot.

Home Depot will have a lot of sales but they also maintain a high amount of physical assets. The Economic Consulting Group however is a service provider and their assets are mainly employees and this cannot be recorded in a balance sheet so they will have higher sales relative to their book assets thereby giving them a higher Asset Turnover ratio.

b. Catalog Shopping Network or Gucci.

Gucci is an actual fashion design house that has stores which means that they have a high amount of assets including inventory. Catalog Shopping Network sells mainly online and so does not need to maintain a high inventory or asset level which means more sales to less assets and a higher Asset Turnover ratio.

c. Electric Utility Co. or Standard Supermarkets.

Electric Utility Co. as an electric provider will have a high amount of assets as the nature of their business demands this. Supermarkets in comparison have less assets and so this will give them a higher Asset Turnover ratio.