Question

Which of the following types of firms do you expect to have particularly high or low asset turnover? Explain why. a. Supermarket b. Pharmaceutical company c. Jewellery retailer d. Software company

Answer 1

Asset turnover is the ratio of the "Sales or Income / Total Assets" of a business. The higher the ratio, the more efficient a company is as a general rule of thumb, since higher asset turnover means higher sales per asset dollar. This is also an measure of the performance of a company with its finances.

Supermarket:- High asset turnover. Supermarkets prefer to be high-volume businesses. Most of the grocery items are perishable in stores, so freshness is also used to differentiate goods, requiring a certain level of inventory turnover. The average customer routinely buys food, thereby ensuring a certain degree of overall business in grocery stores. Including inventories, the main assets of a supermarket are its factories and shops, all designed to be fairly affordable. Large amounts of transactions therefore produce a high degree of calculated asset turnover.

Pharmaceutical company:- The turnover is high-asset. Drugs typically have a shelf life which is limited. Drugs can not be marketed and become useless after they have reached their expiration date. Pharmaceutical firms then aim to reduce production to amounts that can be guaranteed to be marketed until the expiry date. For two reasons, the assets of one pharmaceutical company are relatively low. First, their spending in research and development is costly rather than reported on the company's accounts as an profit. Third, patents usually don't show as properties on the accounts of the pharmaceutical business. High revenues coupled with lower recorded asset rates thus produce a strong estimated turnover of assets.

Jewellery retailer:- Low asset turnover. Jewelry is usually long-lasting, costly and most buyers seldom buy it. Jewelry is indeed a luxury which is quite distinct. A single jewellery store can carry more than 150 different watch styles. The user must pick one watch from within the range as a whole. The jewellery store must therefore keep a large inventory to support its sales. As the principal asset of the jewelry store is inventory, which has a high turnover pace, the average jewelry store would have poor turnover of stock.

Software company:- Low asset turnover. Software company runs on completing client projects or providing other ancillary services. So, these projects or ancillary services are not frequently requested by the clients. So, the asset turnover in the software company remains low for some valid and obvious reasons.

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