Financial Analysis and Interpretation: Ratio of Net Sales to Assets

The ratio of net sales to assets measures how effectively a business is using its assets to generate sales. A high ratio indicates an effective use of assets. The assets used in computing the ratio may be the total assets at the end of the year, the aver­age of the total assets at the beginning and end of the year, or the average of the monthly assets. For our purposes, the average of the total assets at the beginning and end of the year is used.

The ratio of net sales to assets is computed as follows:

To illustrate the use of this ratio, the following data (in millions) were taken from recent annual reports of Dollar Tree, Inc.:

The ratios of net sales to assets for each year are as follows:

Based on the preceding ratios, Dollar Tree improved its ratio of net sales to assets from 2.42 in Year 1 to 2.52 in Year 2. Thus, Dollar Tree improved the utilization of its assets to generate sales in Year 2.

Using the ratio of net sales to assets for comparisons to competitors and with industry averages could also be beneficial in interpreting Dollar Tree’s use of its as­sets. For example, the following data (in millions) were taken from recent annual reports of Dollar General Corporation:

Dollar General’s ratio of net sales to assets for Year 2 is as follows:

Comparing Dollar General’s Year 2 ratio of 1.42 to Dollar Tree’s Year 2 ratio of 2.52 implies that Dollar Tree is using its assets more efficiently than is Dollar General.

Source: Warren Carl S., Reeve James M., Duchac Jonathan (2013), Corporate Financial Accounting, South-Western College Pub; 12th edition.

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