Definition:
Averages total assets is the average book value of the entity’s assets over the different reporting dates. Normally, the value of assets at the reporting date is shown in the balance sheet of the entity.
These assets include book current and fixed assets.
Averages total assets are normally used to assess the return on average assets which is assessing the efficiency of using assets for two or more consecutive times.
For example, the entity might want to assess the return on average assets for the last three years.
To assess this, the entity needs to measure the amount of net income for those three years and then calculate the averages of total assets.
These averages of total assets are the value of assets used by the entity to support the sales and operation of the entity.
Average total assets formula:
Averages total assets = Accumulation of total assets at X period / X period
We can also calculate using another formula:
Averages total assets = (Total assets at Period N + Total Assets Period N+1)/(N + N+1)
Total assets at X period is the book value of assets at the reporting period that the entity wants to assess. For example, the book value of assets at the end of 31 December 2015, 31 December 2016, and 31 December 2017.
X period is the number of periods that the book value of assets is used for calculation. For example, X period of 31 December 2015, 31 December 2016, and December 2017 is 1 + 1 + 1 = 3
The entity could also use the fair value of assets for calculation.
Example:
The entity wants to assess the return average asset over the last three years 2015, 2016, and 2017. Based on financial statements, the value of assets over the last three years is 6,000K, 7,000k, and 8,000K.
CFO wants his accountant to calculate the average total assets for him.
Calculate the average total assets:
Based on the formula above, we can calculate the average total assets follow:
Average total assets = (6,000 + 7,000 + 8,000) / 3 = 7,000K
Based on the above calculation we can get average total assets equal to 7,000K. This figure could be used for calculating the return on average assets for the entity.
Here is another example of how to calculate average total assets
Let’s say we have a company, ABC Inc., and we want to calculate the average total assets for the years N and N+1. Here’s an example using some hypothetical numbers:
- Total Assets at Period N (Year N): $1,000,000
- Total Assets at Period N+1 (Year N+1): $1,500,000
Using the formula:
Averages Total Assets = (Total Assets at Period N + Total Assets at Period N+1) / (N + N+1)
Averages Total Assets = ($1,000,000 + $1,500,000) / (N + N+1)
Averages Total Assets = $2,500,000 / (N + N+1)
Let’s say N = 2022 and N+1 = 2023:
Averages Total Assets = $2,500,000 / (2022 + 2023) Averages Total Assets = $2,500,000 / 4045 Averages Total Assets ≈ $617.74
So, the average total assets for the years 2022 and 2023 for ABC Inc. would be approximately $617.74. This calculation gives us an idea of the average size of the company’s assets over this two-year period.
What Does Average Total Assets Use for?
Average Total Assets is a critical financial metric with several vital applications in assessing a company’s operational efficiency and financial health.
This metric provides valuable insights into the company’s asset management, leverage, and profitability.
Here’s how Average Total Assets are used:
Compared to Total Sales:
The most prevalent application of Average Total Assets is its comparison to Total Sales.
By juxtaposing these two figures, we can ascertain the amount of assets a company requires to support a given level of sales.
A lower asset level relative to sales suggests that the management effectively utilizes its assets to operate the business efficiently.
This comparison shows the company’s ability to manage its resources judiciously.
Calculating Debt-to-Asset Ratio:
The debt-to-asset ratio gauges the extent of a company’s indebtedness to its assets.
Calculating this ratio involves dividing the total debt by the Average Total Assets.
A higher debt-to-asset ratio indicates a greater reliance on borrowed funds and signifies potential financial vulnerability.
This metric helps assess the risk level associated with the company’s capital structure.
Calculating Asset Turnover Ratio:
The asset turnover ratio evaluates how adeptly a company utilizes its assets to generate sales revenue.
The total sales are divided by the Average Total Assets to compute this ratio.
A higher asset turnover ratio indicates efficient asset utilization, suggesting that the company generates substantial sales relative to its asset base.
This metric provides insights into the company’s operational efficiency and resource management.
Calculating Return on Average Assets (ROA):
Return on Average Assets (ROA) measures a company’s profitability of its assets.
This metric is determined by dividing the net income by the Average Total Assets.
A higher ROA signifies that the company generates robust profits from asset investments.
ROA is a valuable indicator of a company’s ability to create earnings using its asset base efficiently.
Average Total Assets is a fundamental metric that finds application across various financial analyses.
Its uses range from evaluating operational efficiency and leverage to assessing profitability.
By understanding and interpreting this metric, stakeholders gain valuable insights into a company’s financial performance and ability to utilize assets to achieve its business objectives effectively.