What Is Asset Valuation? Absolute Valuation Methods, and Example

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What is Asset Valuation?

Asset valuation is the process of determining the fair market or present value of assets, using book values, absolute valuation models like discounted cash flow analysis, option pricing models or comparables. Such assets include investments in marketable securities such as stocks, bonds and options; tangible assets like buildings and equipment; or intangible assets such as brands, patents and trademarks.

Understanding Asset Valuation

Asset valuation plays a key role in finance and often consists of both subjective and objective measurements. The value of a company’s fixed assets – which are also known as capital assets or property plant and equipment – are straightforward to value, based on their book values and replacement costs. However, there’s no number on the financial statements that tell investors exactly how much a company’s brand and intellectual property are worth. Companies can overvalue goodwill in an acquisition as the valuation of intangible assets is subjective and can be difficult to measure.

Key Takeaways

  • Asset valuation is the process of determining the fair market value of an asset.
  • Asset valuation often consists of both subjective and objective measurements.
  • Net asset value is the book value of tangible assets, less intangible assets and liabilities.
  • Absolute value models value assets based only on the characteristics of that asset, such as discounted dividend, discounted free cash flow, residential income and discounted asset models.
  • Relative valuation ratios, such as the P/E ratio, help investors determine asset valuation by comparing similar assets.

Net Asset Value

The net asset value – also known as net tangible assets – is the book value of tangible assets on the balance sheet (their historical cost minus the accumulated depreciation) less intangible assets and liabilities – or the money that would be left over if the company was liquidated. This is the minimum a company is worth and can provide a useful floor for a company’s asset value because it excludes intangible assets. A stock would be considered undervalued if its market value were below book value, which means the stock is trading at a deep discount to book value per share.

However, the market value for an asset is likely to differ significantly from book value – or shareholders’ equity – which is based on historical cost. And some companies’ greatest value is in their intangible assets, like the findings of a biomedical research company.

Absolute Valuation Methods

Absolute value models value assets based only on the characteristics of that asset. These models are known as discounted cash flow (DCF) models, and value assets like stocks, bonds and real estate, based on their future cash flows and the opportunity cost of capital. They include:

  • Discounted dividend models, which value a stock’s price by discounting predicted dividends to the present value. If the value obtained from the DDM is higher than the current trading price of shares, then the stock is undervalued.
  • Discounted free cash flow models calculate the present value of future free cash flow projections, discounted by the weighted average cost of capital.
  • Residual income valuation models consider all the cash flows that accrue to the firm post the payment to suppliers and other outside parties. The value of the company is the sum of book value and the present value of expected future residual income. Residual income is calculated as net income less a charge for the cost of capital. The charge is known as the equity charge and is calculated as the value of equity capital multiplied by the cost of equity or the required rate of return on equity. Given the opportunity cost of equity, a company can have positive net income but negative residual income.
  • Discounted asset models value a company by calculating the present market value of the assets it owns. As this method does not take into account any synergies, it’s only useful for valuing commodity businesses like mining companies.

Relative Valuation & Comparable Transactions

Relative valuation models determine the value based on the observation of market prices of similar assets. For example, one way of determining the value of a property is to compare it with similar properties in the same area. Likewise, investors use the price multiples comparable public companies trade at to get an idea of relative market valuations. Stocks are often valued based on comparable valuation metrics such as the price-to-earnings ratio (P/E ratio), price-to-book ratio or the price-to-cash flow ratio.

This method is also used to value illiquid assets like private companies with no market price. Venture capitalists refer to valuing a company’s stock before it goes public as pre-money valuation. By looking at the amounts paid for similar companies in past transactions, investors get an indication of an unlisted company’s potential value. This is called precedent transaction analysis.

Real World Example of Asset Valuation

Let’s work out net asset value for Alphabet Inc. (GOOG), the parent company of search engine and advertising giant Google.

All figures are for the period ending Dec. 31, 2018.

  • Total assets: $232.8 billion
  • Total intangible assets: $2.2 billion
  • Total liabilities: $55.2 billion

Total net asset value: $175.4 billion (total assets $232.8 billion – total intangible assets $2.2 billion – total liabilities $55.2 billion)

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Asset Turnover Ratio Definition

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Asset Turnover Ratio Definition

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What Is the Asset Turnover Ratio?

The asset turnover ratio measures the value of a company’s sales or revenues relative to the value of its assets. The asset turnover ratio can be used as an indicator of the efficiency with which a company is using its assets to generate revenue.

The higher the asset turnover ratio, the more efficient a company is at generating revenue from its assets. Conversely, if a company has a low asset turnover ratio, it indicates it is not efficiently using its assets to generate sales.

Key Takeaways

  • Asset turnover is the ratio of total sales or revenue to average assets.
  • This metric helps investors understand how effectively companies are using their assets to generate sales.
  • Investors use the asset turnover ratio to compare similar companies in the same sector or group.
  • A company’s asset turnover ratio can be impacted by large asset sales as well as significant asset purchases in a given year.

Formula and Calculation of the Asset Turnover Ratio

Below are the steps as well as the formula for calculating the asset turnover ratio.


Asset Turnover = Total Sales Beginning Assets   +   Ending Assets 2 where: Total Sales = Annual sales total Beginning Assets = Assets at start of year Ending Assets = Assets at end of year \begin{aligned} &\text{Asset Turnover} = \frac{ \text{Total Sales} }{ \frac { \text{Beginning Assets}\ +\ \text{Ending Assets} }{ 2 } } \\ &\textbf{where:}\\ &\text{Total Sales} = \text{Annual sales total} \\ &\text{Beginning Assets} = \text{Assets at start of year} \\ &\text{Ending Assets} = \text{Assets at end of year} \\ \end{aligned} ​Asset Turnover=2Beginning Assets + Ending Assets​Total Sales​where:Total Sales=Annual sales totalBeginning Assets=Assets at start of yearEnding Assets=Assets at end of year​

The asset turnover ratio uses the value of a company’s assets in the denominator of the formula. To determine the value of a company’s assets, the average value of the assets for the year needs to first be calculated.

  1. Locate the value of the company’s assets on the balance sheet as of the start of the year.
  2. Locate the ending balance or value of the company’s assets at the end of the year.
  3. Add the beginning asset value to the ending value and divide the sum by two, which will provide an average value of the assets for the year.
  4. Locate total sales—it could be listed as revenue—on the income statement.
  5. Divide total sales or revenue by the average value of the assets for the year.

What the Asset Turnover Ratio Can Tell You

Typically, the asset turnover ratio is calculated on an annual basis. The higher the asset turnover ratio, the better the company is performing, since higher ratios imply that the company is generating more revenue per dollar of assets.

The asset turnover ratio tends to be higher for companies in certain sectors than in others. Retail and consumer staples, for example, have relatively small asset bases but have high sales volume—thus, they have the highest average asset turnover ratio. Conversely, firms in sectors such as utilities and real estate have large asset bases and low asset turnover.

Since this ratio can vary widely from one industry to the next, comparing the asset turnover ratios of a retail company and a telecommunications company would not be very productive. Comparisons are only meaningful when they are made for different companies within the same sector.

Example of How to Use the Asset Turnover Ratio

Let’s calculate the asset turnover ratio for four companies in the retail and telecommunication-utilities sectors for FY 2020—Walmart Inc. (WMT), Target Corporation (TGT), AT&T Inc. (T), and Verizon Communications Inc. (VZ).

Asset Turnover Examples
($ Millions)   Walmart Target AT&T Verizon
Beginning Assets 219,295  42,779 551,669 291,727
Ending Assets 236,495  51,248 525,761 316,481
Avg. Total Assets 227,895 47,014 538,715 304,104
Revenue 524,000 93,561 171,760 128,292
Asset Turnover 2.3x 2.0x 0.32x 0.42x
Asset Turnover Examples

AT&T and Verizon have asset turnover ratios of less than one, which is typical for firms in the telecommunications-utilities sector. Since these companies have large asset bases, it is expected that they would slowly turn over their assets through sales.

Clearly, it would not make sense to compare the asset turnover ratios for Walmart and AT&T, since they operate in very different industries. But comparing the relative asset turnover ratios for AT&T compared with Verizon may provide a better estimate of which company is using assets more efficiently in that industry. From the table, Verizon turns over its assets at a faster rate than AT&T.

For every dollar in assets, Walmart generated $2.30 in sales, while Target generated $2.00. Target’s turnover could indicate that the retail company was experiencing sluggish sales or holding obsolete inventory.

Furthermore, its low turnover may also mean that the company has lax collection methods. The firm’s collection period may be too long, leading to higher accounts receivable. Target, Inc. could also not be using its assets efficiently: fixed assets such as property or equipment could be sitting idle or not being utilized to their full capacity.

Using the Asset Turnover Ratio With DuPont Analysis

The asset turnover ratio is a key component of DuPont analysis, a system that the DuPont Corporation began using during the 1920s to evaluate performance across corporate divisions. The first step of DuPont analysis breaks down return on equity (ROE) into three components, one of which is asset turnover, the other two being profit margin, and financial leverage. The first step of DuPont analysis can be illustrated as follows:


ROE = ( Net Income Revenue ) ⎵ Profit Margin × ( Revenue AA ) ⎵ Asset Turnover × ( AA AE ) ⎵ Financial Leverage where: AA = Average assets AE = Average equity \begin{aligned} &\text{ROE} = \underbrace{ \left ( \frac{ \text{Net Income} }{ \text{Revenue} } \right ) }_\text{Profit Margin} \times \underbrace{ \left ( \frac{ \text{Revenue} }{ \text{AA} } \right ) }_\text{Asset Turnover} \times \underbrace{ \left ( \frac{ \text{AA} }{ \text{AE} } \right ) }_\text{Financial Leverage} \\ &\textbf{where:}\\ &\text{AA} = \text{Average assets} \\ &\text{AE} = \text{Average equity} \\ \end{aligned} ​ROE=Profit Margin(RevenueNet Income​)​​×Asset Turnover(AARevenue​)​​×Financial Leverage(AEAA​)​​where:AA=Average assetsAE=Average equity​

Sometimes, investors and analysts are more interested in measuring how quickly a company turns its fixed assets or current assets into sales. In these cases, the analyst can use specific ratios, such as the fixed-asset turnover ratio or the working capital ratio to calculate the efficiency of these asset classes. The working capital ratio measures how well a company uses its financing from working capital to generate sales or revenue.

The Difference Between Asset Turnover and Fixed Asset Turnover

While the asset turnover ratio considers average total assets in the denominator, the fixed asset turnover ratio looks at only fixed assets. The fixed asset turnover ratio (FAT) is, in general, used by analysts to measure operating performance. This efficiency ratio compares net sales (income statement) to fixed assets (balance sheet) and measures a company’s ability to generate net sales from its fixed-asset investments, namely property, plant, and equipment (PP&E).

The fixed asset balance is a used net of accumulated depreciation. Depreciation is the allocation of the cost of a fixed asset, which is spread out—or expensed—each year throughout the asset’s useful life. Typically, a higher fixed asset turnover ratio indicates that a company has more effectively utilized its investment in fixed assets to generate revenue.

Limitations of Using the Asset Turnover Ratio

While the asset turnover ratio should be used to compare stocks that are similar, the metric does not provide all of the detail that would be helpful for stock analysis. It is possible that a company’s asset turnover ratio in any single year differs substantially from previous or subsequent years. Investors should review the trend in the asset turnover ratio over time to determine whether asset usage is improving or deteriorating.

The asset turnover ratio may be artificially deflated when a company makes large asset purchases in anticipation of higher growth. Likewise, selling off assets to prepare for declining growth will artificially inflate the ratio. Also, many other factors (such as seasonality) can affect a company’s asset turnover ratio during periods shorter than a year.

What Is Asset Turnover Measuring?

The asset turnover ratio measures the efficiency of a company’s assets in generating revenue or sales. It compares the dollar amount of sales (revenues) to its total assets as an annualized percentage. Thus, to calculate the asset turnover ratio, divide net sales or revenue by the average total assets. One variation on this metric considers only a company’s fixed assets (the FAT ratio) instead of total assets.

Is It Better to Have a High or Low Asset Turnover?

Generally, a higher ratio is favored because it implies that the company is efficient in generating sales or revenues from its asset base. A lower ratio indicates that a company is not using its assets efficiently and may have internal problems.

What Is a Good Asset Turnover Value?

Asset turnover ratios vary across different industry sectors, so only the ratios of companies that are in the same sector should be compared. For example, retail or service sector companies have relatively small asset bases combined with high sales volume. This leads to a high average asset turnover ratio. Meanwhile, firms in sectors like utilities or manufacturing tend to have large asset bases, which translates to lower asset turnover.

How Can a Company Improve Its Asset Turnover Ratio?

A company may attempt to raise a low asset turnover ratio by stocking its shelves with highly salable items, replenishing inventory only when necessary, and augmenting its hours of operation to increase customer foot traffic and spike sales. Just-in-time (JIT) inventory management, for instance, is a system whereby a firm receives inputs as close as possible to when they are actually needed. So, if a car assembly plant needs to install airbags, it does not keep a stock of airbags on its shelves, but receives them as those cars come onto the assembly line.

Can Asset Turnover Be Gamed by a Company?

Like many other accounting figures, a company’s management can attempt to make its efficiency seem better on paper than it actually is. Selling off assets to prepare for declining growth, for instance, has the effect of artificially inflating the ratio. Changing depreciation methods for fixed assets can have a similar effect as it will change the accounting value of the firm’s assets.

The Bottom Line

The asset turnover ratio is a metric that compares revenues to assets. A high asset turnover ratio indicates a company that is exceptionally effective at extracting a high level of revenue from a relatively low number of assets. As with other business metrics, the asset turnover ratio is most effective when used to compare different companies in the same industry.

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Asset Swap: Definition, How It Works, Calculating the Spread

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Asset Swap: Definition, How It Works, Calculating the Spread

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What Is an Asset Swap?

An asset swap is similar in structure to a plain vanilla swap with the key difference being the underlying of the swap contract. Rather than regular fixed and floating loan interest rates being swapped, fixed and floating assets are being exchanged.

All swaps are derivative contracts through which two parties exchange financial instruments. These instruments can be almost anything, but most swaps involve cash flows based on a notional principal amount agreed upon by both parties. As the name suggests, asset swaps involve an actual asset exchange instead of just cash flows.

Swaps do not trade on exchanges, and retail investors do not generally engage in swaps. Rather, swaps are over-the-counter (OTC) contracts between businesses or financial institutions.

Key Takeaways

  • An asset swap is used to transform cash flow characteristics to hedge risks from one financial instrument with undesirable cash flow characteristics into another with favorable cash flow.
  • There are two parties in an asset swap transaction: a protection seller, which receives cash flows from the bond, and a swap buyer, which hedges risk associated with the bond by selling it to a protection seller.
  • The seller pays an asset swap spread, which is equal to the overnight rate plus (or minus) a pre-calculated spread.

Understanding an Asset Swap

Asset swaps can be used to overlay the fixed interest rates of bond coupons with floating rates. In that sense, they are used to transform cash flow characteristics of underlying assets and transforming them to hedge the asset’s risks, whether related to currency, credit, and/or interest rates.

Typically, an asset swap involves transactions in which the investor acquires a bond position and then enters into an interest rate swap with the bank that sold them the bond. The investor pays fixed and receives floating. This transforms the fixed coupon of the bond into a LIBOR-based floating coupon.

It is widely used by banks to convert their long-term fixed rate assets to a floating rate in order to match their short-term liabilities (depositor accounts).

Another use is to insure against loss due to credit risk, such as default or bankruptcy, of the bond’s issuer. Here, the swap buyer is also buying protection.

The Process of an Asset Swap 

Whether the swap is to hedge interest rate risk or default risk, there are two separate trades that occur.

First, the swap buyer purchases a bond from the swap seller in return for a full price of par plus accrued interest (called the dirty price).

Next, the two parties create a contract where the buyer agrees to pay fixed coupons to the swap seller equal to the fixed rate coupons received from the bond. In return, the swap buyer receives variable rate payments of LIBOR plus (or minus) an agreed-upon fixed spread. The maturity of this swap is the same as the maturity of the asset.

The mechanics are the same for the swap buyer wishing to hedge default or some other event risk. Here, the swap buyer is essentially buying protection and the swap seller is also selling that protection.

As before, the swap seller (protection seller) will agree to pay the swap buyer (protection buyer) LIBOR plus (or minus) a spread in return for the cash flows of the risky bond (the bond itself does not change hands). In the event of default, the swap buyer will continue to receive LIBOR plus (or minus) the spread from the swap seller. In this way, the swap buyer has transformed its original risk profile by changing both its interest rate and credit risk exposure.

Due to recent scandals and questions around its validity as a benchmark rate, LIBOR is being phased out. According to the Federal Reserve and regulators in the U.K., LIBOR will be phased out by June 30, 2023, and will be replaced by the Secured Overnight Financing Rate (SOFR). As part of this phase-out, LIBOR one-week and two-month USD LIBOR rates will no longer be published after Dec. 31, 2021. 

How Is the Spread of an Asset Swap Calculated?

There are two components used in calculating the spread for an asset swap. The first one is the value of coupons of underlying assets minus par swap rates. The second component is a comparison between bond prices and par values to determine the price that the investor has to pay over the lifetime of the swap. The difference between these two components is the asset swap spread paid by the protection seller to the swap buyer.

Example of an Asset Swap

Suppose an investor buys a bond at a dirty price of 110% and wants to hedge the risk of a default by the bond issuer. She contacts a bank for an asset swap. The bond’s fixed coupons are 6% of par value. The swap rate is 5%. Assume that the investor has to pay 0.5% price premium during the swap’s lifetime. Then the asset swap spread is 0.5% (6 – 5 – 0.5). Hence the bank pays the investor LIBOR rates plus 0.5% during the swap’s lifetime.

Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.

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What Is Asset Management, and What Do Asset Managers Do?

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What Is Asset Management, and What Do Asset Managers Do?

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What Is Asset Management?

Asset management is the practice of increasing total wealth over time by acquiring, maintaining, and trading investments that have the potential to grow in value.

Asset management professionals perform this service for others. They may also be called portfolio managers or financial advisors. Many work independently while others work for an investment bank or other financial institution.

Key Takeaways

  • The goal of asset management is to maximize the value of an investment portfolio over time while maintaining an acceptable level of risk.
  • Asset management as a service is offered by financial institutions catering to high-net-worth individuals, government entities, corporations, and institutional investors like colleges and pension funds.
  • Asset managers have fiduciary responsibilities. They make decisions on behalf of their clients and are required to do so in good faith.

Understanding Asset Management

Asset management has a double-barreled goal: increasing value while mitigating risk. That is, the client’s tolerance for risk is the first question to be posed. A retiree living on the income from a portfolio, or a pension fund administrator overseeing retirement funds, is (or should be) risk-averse. A young person, or any adventurous person, might want to dabble in high-risk investments.

Most of us are somewhere in the middle, and asset managers try to identify just where that is for a client.

The asset manager’s role is to determine what investments to make, or avoid, to realize the client’s financial goals within the limits of the client’s risk tolerance. The investments may include stocks, bonds, real estate, commodities, alternative investments, and mutual funds, among the better-known choices.

The asset manager is expected to conduct rigorous research using both macro and microanalytical tools. This includes statistical analysis of prevailing market trends, reviews of corporate financial documents, and anything else that would aid in achieving the stated goal of client asset appreciation.

Types of Asset Managers

There are several different types of asset managers, distinguished by the type of asset and level of service that they provide. Each type of asset manager has a different level of responsibility to the client, so it is important to understand a manager’s obligations before deciding to invest.

Registered Investment Advisers

A registered investment adviser (RIA) is a firm that advises clients on securities trades or even manages their portfolios. RIAs are closely regulated and are required to register with the SEC if they manage more than $100 million in assets.

Investment Broker

A broker is an individual or firm that acts as an intermediary for their clients, buying stocks and securities and providing custody over customer assets. Brokers generally do not have a fiduciary duty to their clients, so it is always important to thoroughly research before buying.

Financial Advisor

A financial advisor is a professional who can recommend investments to their clients, or buy and sell securities on their behalf. Financial advisors may or may not have a fiduciary duty to their clients, so it is always important to ask first. Many financial advisors specialize in a specific area, such as tax law or estate planning.

Robo-Advisor

The most affordable type of investment manager isn’t a person at all. A robo-advisor is a computer algorithm that automatically monitors and rebalances an investor’s portfolio according, selling and buying investments according to programmed goals and risk tolerances. Because there is no person involved, robo-advisors cost much less than a personalized investment service.

How Much Does Asset Management Cost?

Asset managers have a variety of fee structures. The most common model charges a percentage of the assets under management, with the industry average at about 1% for up to $1 million, and lower for larger portfolios. Others may charge a fee for each trade they execute. Some may even receive a commission to upsell securities to their clients.

Because these incentives can work against the client’s interests, it is important to know if your management firm has a fiduciary duty to serve the client’s interests. Otherwise, they may recommend investments or trades that do not serve the client’s interests.

How Asset Management Companies Work

Asset management companies compete to serve the investment needs of high-net-worth individuals and institutions.

Accounts held by financial institutions often include check-writing privileges, credit cards, debit cards, margin loans, and brokerage services.

When individuals deposit money into their accounts, it is typically placed into a money market fund that offers a greater return than a regular savings account. Account-holders can choose between Federal Deposit Insurance Company-backed (FDIC) funds and non-FDIC funds.

The added benefit to account holders is all of their banking and investing needs can be met by the same institution.

These types of accounts have only been possible since the passage of the Gramm-Leach-Bliley Act in 1999, which replaced the Glass-Steagall Act. The Glass-Steagall Act of 1933, passed during the Great Depression, forced a separation between banking and investing services. Now, they have only to maintain a “Chinese wall” between divisions.

Example of an Asset Management Institution

Merrill Lynch offers a Cash Management Account (CMA) to fulfill the needs of clients who wish to pursue banking and investment options with one vehicle, under one roof.

The account gives investors access to a personal financial advisor. This advisor offers advice and a range of investment options that include initial public offerings (IPO) in which Merrill Lynch may participate, as well as foreign currency transactions.

Interest rates for cash deposits are tiered. Deposit accounts can be linked together so that all eligible funds aggregate to receive the appropriate rate. Securities held in the account fall under the protective umbrella of the Securities Investor Protection Corporation (SIPC). SIPC does not shield investor assets from inherent risk but rather protects those assets from the financial failure of the brokerage firm itself.

Along with typical check writing services, the account offers worldwide access to Bank of America automated teller machines (ATM) without transaction fees. Bill payment services, fund transfers, and wire transfers are available. The MyMerrill app allows users to access the account and perform a number of basic functions via a mobile device.

Accounts with more than $250,000 in eligible assets sidestep both the annual $125 fee and the $25 assessment applied to each sub-account held.

Frequently Asked Questions

How Does an Asset Management Company Differ From a Brokerage?

Asset management institutions are fiduciary firms. That is, their clients give them discretionary trading authority over their accounts, and they are legally bound to act in good faith on the client’s behalf.

Brokers must get the client’s permission before executing a trade. (Online brokers let their clients make their own decisions and initiate their own trades.)

Asset management firms cater to the wealthy. They usually have higher minimum investment thresholds than brokerages do, and they charge fees rather than commissions.

Brokerage houses are open to any investor. The companies have a legal standard to manage the fund to the best of their ability and in line with their clients’ stated goals.

What Does an Asset Manager Do?

An asset manager initially meets with a client to determine what the client’s long-term financial objectives are and how much risk the client is willing to accept to get there.

From there, the manager will propose a mix of investments that matches the objectives.

The manager is responsible for creating the client’s portfolio, overseeing it from day to day, making changes to it as needed, and communicating regularly with the client about those changes.

What Are the Top Asset Management Institutions?

As of 2022, the five largest asset management institutions, based on global assets under management (AUM), were BlackRock ($8.5 trillion), Vanguard Group ($7.3 trillion), UBS Group ($3.5 trillion), Fidelity Investments ($3.7trillion), and State Street Global Advisors ($4.0 trillion).

What Is Digital Asset Management?

Digital asset management, or DAM, is a process of storing media assets in a central repository where they can be accessed as necessary by all members of an organization. This is usually used for large audio or video files that need to be worked on by many teams of employees at once.

What Is Assets Under Management?

Assets under management, or AUM, refers to the total value of the securities in the portfolio of a brokerage or investment firm.

The Bottom Line

Asset management firms provide the service of buying and selling assets on behalf of their clients. There are many types of asset managers, with some working for family offices and wealthy individuals and others working on behalf of major banks and institutional investors.

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