Decision Analysis: Total Asset Turnover and Times Interest Earned Ratio

Total Asset Turnover

One important measure of a company's ability to use its assets efficiently and effectively is total asset turnover.

Total asset turnover = net sales/average total assets

Net sales is net amounts earned from the sale of products and services. Average total assets is (current period-end total assets + prior period-end total assets)/2. A higher total asset turnover means a company is generating more net sales for each dollar of assets. Management is evaluated on efficient and effective use of total assets by looking at total asset turnover.

Company	$ millions	2017	2016	2015
Starbucks	Net sales	$22,387	$21,316	$19,163
	Average total assets	$14,339	$13,364	$11,585
	Total asset turnover	1.56	1.60	1.65
Jack in the Box	Net sales	$1,554	$1,599	$1,540
	Average total assets	$1,289	$1,326	$1,287
	Total asset turnover	1.21	1.21	1.20

We express Starbucks's use of assets in generating net sales by saying "it turned its assets over 1.56 times during the current year." This means that each $1.00 of assets produced 1.56 of net sales.

Interpreting the total asset turnover requires an understanding of company operations. Some operations are capital-intensive, meaning that a relatively large amount is invested in plant assets to generate sales. This results in a lower total asset turnover. Other companies' operations are labor-intensive, meaning that they generate sales using employees instead of assets. In that case, we expect a higher total asset turnover.

Starbucks's turnover is higher than that for Jack in the Box. However, Starbucks's total asset turnover decreased over the last 3 years. To maintain a strong total asset turnover, Starbucks must grow sales at a rate equal to, or higher than, its total asset growth.

Times Interest Earned Ratio

Interest expense is often called a fixed expense because it usually does not vary due to short-term changes in sales or other operating activities. While fixed expenses can be good when a company is growing, they create risk. The risk is that a company might be unable to pay fixed expenses if sales decline.

Times interest earned = Income before interest expense and income taxes (EBIT)/Interest expense

Company	$ millions	2017	2016	2015
Starbucks	Net income before interest and taxes	$4,410	$4,279.9	3,973.5
	Interest expense	$92.5	$81.3	70.5
	Times interest earned	47.68	52.64	56.36

Please respond to this forum by Sunday, April 18th before 11:30 p.m. Please provide the following information:

• Calculate total asset turnover and times interest earned
• Provide ratio analysis for each company