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Hello Sir, the asset turnover formula in the DuPont system of ratio analysis is sales/total assets while its formula under ROCE (Profit margin x Asset turnover = ROCE) is sales/capital employed. I’m a bit confused about this, please explain. Thank you very much!
Asset turnover can be expressed in two different ways (there are no rules in practice and you certainly do not have to have heard of “DuPont” for Paper F9).
It is usually measured as Sales / (non-current assets + current assets – current liabilities)
(Non-current assets + current assets – current liabilities) are equal to the long-term capital employed (which is shareholders funds + non-current liabilities).
So asset turnover can also be expressed as sales / capital employed (it is the same thing as above)
The alternative is to look at non-current asset turnover, which is sales / non-current assets (on the basis that it is the non-current assets that are actually generating the revenue), however don’t do it this way unless you are specifically told to in the exam.
(If you wish to revise all the accounting ratios, then they are covered in Chapter 15 of the free Paper F5 Lectures Notes, and the free lecture that goes with it. They are not repeated in the Paper F9 Lecture Notes because although occasionally some ratios are asked in F9, it is in F5 that they are much more commonly asked)
Thank you for the detailed explanation, Sir! I’m glad to strike DuPont off the long list for F9 and will be sure to check out the F5 section on this. Thanks again 🙂
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