Verizon Communications Inc. is a major telecommunications company in the United States. Two recent balance sheets for Verizon disclosed the following information regarding fixed assets:
End of Year (in millions) Beginning of Year (in millions) Property, plant, and equipment $220,163 $230,508 Less accumulated depreciation 136,622 140,561 Property, plant, and equipment (net) $ 83,541 $ 89,947
Verizon’s revenue for the year was $131,620 million. Assume that the fixed asset turnover ratio for the telecommunications industry averages approximately 1.1.
a. Determine Verizon’s fixed asset turnover ratio. Round to one decimal place.
b. Interpret this ratio with respect to the industry average.
Answer:
Verizon: $
131,620 = 1.5 ($89,947 + $83,541) / 2
Verizon earns $1.50 revenue for every dollar of fixed assets. Telecommunications
requires a significant investment in the network in order to generate revenues.
The industry average fixed asset turnover ratio is 1.1. Thus, Verizon is using its
fixed assets more efficiently in generating revenues than the industry as a whole.
The reason would require further analysis into the nature of Verizon’s fixed assets
and revenues, but is likely related to having high data volume on its network.