Accounting Questions and Answers: EX 10-23 Fixed asset turnover ratio

Amazon.com, Inc. is the world’s leading Internet retailer of merchandise and media. Amazon also designs and sells electronic products, such as e-readers. Netflix, Inc.isthe world’sleading Internet television network. Both companies competeinthe digital media and streaming space. However, Netflix is more narrowly focused in the digital streaming business than is Amazon. Sales and average book value of fixed assets information (in millions) are provided for Amazon and Netflix for a recent year as follows:

Amazon | Netflix

Sales $107,006 | $6,780

Average book value of fixed assets 19,403 | 162

a. Compute the fixed asset turnover ratio for each company. Round to one decimal place.

b. Which company is more efficient in generating sales from fixed assets?

c. Interpret your results.

Answer:

$107,006

$19,403

$6,780

$162

5.5

41.9

b. Netflix is more efficient than Amazon in generating revenue from fixed assets.

Netflix’s fixed asset turnover ratio is 41.9, which means it is able to generate $41.90

of revenue for every dollar of fixed assets. Amazon’s fixed asset turnover ratio is 5.5,

which is only $5.50 of revenue for every dollar of fixed assets. Netflix’s fixed asset

turnover ratio is more than 7 times larger than Amazon’s (41.9 ÷ 5.5).

c. The difference in their fixed asset turnover ratios reflects the difference in their

core businesses. Netflix is mostly an Internet streaming and DVD rental company.

These services do not require significant fixed assets. The most significant fixed

assets of Netflix are its information technology assets, followed by its headquarters

and DVD mailing operations. Amazon also provides streaming services, media

downloads, and other electronic products. In addition, Amazon sells a wide

assortment of merchandise and markets Kindle

products. This broader

assortment of activities requires more extensive use of fixed assets beyond

information technology, including warehouses and equipment. These additional

fixed assets are the cause of Amazon’s lower fixed asset turnover ratio.