What is Non-current Asset Turnover Ratio?
This refers to level of contribution made by pure non-current assets towards sales or turnover generation. In this case, we are not factoring the contribution from current assets. Non-current assets is the determining factor such that if it is effective in its functionality, then a small change in capital employed will result to relatively more change in the sales level of the firm (holding other factors such as selling price constant). However, if the total assets are not efficient enough, the corresponding change in sales will be minimal. It should be noted that this proportion displays the proficiency of non-current assets in the business sales level.
Demonstration
Example
You were furnished with the following information of Turn Around co ltd for the year ended 31st/12/2020,
Additional information
Net sales for the year ended 31st/12/2020 was $1,200,000
Required
Compute the non-current asset turnover ratio and comment on the efficiency of the non-current asset
Solution
Interpretation
For every 1.00$ invested in non-current assets, the business generates $1.33 of sales.
Applicability of non-current asset Turnover Ratio in Decision Making by Management
Non-current Asset turnover Ratio which is expressed as
demonstrates the level of efficiency with which pure fixed assets contribute towards net sales
Denominator factor; Non-current asset, also referred to as fixed asset is in the hands of the management and since there are many logistics involved in its management, the following are the decision making key points the management need to utilize to improve its efficiency
Aspect of
Cost of acquisition; the management need to consider the fairest cost price of the fixed assets to be acquired to ensure that net sale/non-current asset ratio improves
Aspect of
Quality; the management has to ensure that the quality of the fixed asset is not compromised and this can be achieved if the management is in a position to identify the best supplier of the assets.
Aspect of
Depreciation; fixed assets under go wear and tear process on usage such that the original efficiency of the asset goes down with time. The management need to plan to maintain the fixed assets such that efficiency is maintained and where the asset is beyond repair or maintenance, then disposal decision should be made in a timely manner so as to replace the old asset with anew more efficient one. This decision helps in maintaining the sales value at high levels.
Numerator factor; This factor is represented by net sales and the changes that occur in it are majorly from the changes occurring in fixed assets. So the management do not need to invest its decision making time to chant the way forward for this may result to small change in net sales.
