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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 AssetsTotal Saleswhere: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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Assets Under Management (AUM): Definition, Calculation, and Example

Written by admin. Posted in A, Financial Terms Dictionary

Assets Under Management (AUM): Definition, Calculation, and Example

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What Are Assets Under Management (AUM)?

Assets under management (AUM) is the total market value of the investments that a person or entity manages on behalf of clients. Assets under management definitions and formulas vary by company.

In the calculation of AUM, some financial institutions include bank deposits, mutual funds, and cash in their calculations. Others limit it to funds under discretionary management, where the investor assigns authority to the company to trade on their behalf.

Overall, AUM is only one aspect used in evaluating a company or investment. It is also usually considered in conjunction with management performance and management experience. However, investors often consider higher investment inflows and higher AUM comparisons as a positive indicator of quality and management experience.

Key Takeaways

  • Assets under management (AUM) is the total market value of the investments that a person or entity handles on behalf of investors.
  • AUM fluctuates daily, reflecting the flow of money in and out of a particular fund and the price performance of the assets.
  • Funds with larger AUM tend to be more easily traded.
  • A fund’s management fees and expenses are often calculated as a percentage of AUM.

Understanding Assets Under Management

Assets under management refers to how much money a hedge fund or financial institution is managing for their clients. AUM is the sum of the market value for all of the investments managed by a fund or family of funds, a venture capital firm, brokerage company, or an individual registered as an investment advisor or portfolio manager.

Used to indicate the size or amount, AUM can be segregated in many ways. It can refer to the total amount of assets managed for all clients, or it can refer to the total assets managed for a specific client. AUM includes the capital the manager can use to make transactions for one or all clients, usually on a discretionary basis.

For example, if an investor has $50,000 invested in a mutual fund, those funds become part of the total AUM—the pool of funds. The fund manager can buy and sell shares following the fund’s investment objective using all of the invested funds without obtaining any additional special permissions.

Within the wealth management industry, some investment managers may have requirements based on AUM. In other words, an investor may need a minimum amount of personal AUM for that investor to be qualified for a certain type of investment, such as a hedge fund. Wealth managers want to ensure the client can withstand adverse markets without taking too large of a financial hit. An investor’s individual AUM can also be a factor in determining the type of services received from a financial advisor or brokerage company. In some cases, individual assets under management may also coincide with an individual’s net worth.

Calculating Assets Under Management

Methods of calculating assets under management vary among companies. Assets under management depends on the flow of investor money in and out of a particular fund and as a result, can fluctuate daily. Also, asset performance, capital appreciation, and reinvested dividends will all increase the AUM of a fund. Also, total firm assets under management can increase when new customers and their assets are acquired.

Factors causing decreases in AUM include decreases in market value from investment performance losses, fund closures, and a decrease in investor flows. Assets under management can be limited to all of the investor capital invested across all of the firm’s products, or it can include capital owned by the investment company executives.

In the United States, the Securities and Exchange Commission (SEC) has AUM requirements for funds and investment firms in which they must register with the SEC. The SEC is responsible for regulating the financial markets to ensure that it functions in a fair and orderly manner. The SEC requirement for registration can range between $25 million to $110 million in AUM, depending on several factors, including the size and location of the firm.

Why AUM Matters

Firm management will monitor AUM as it relates to investment strategy and investor product flows in determining the strength of the company. Investment companies also use assets under management as a marketing tool to attract new investors. AUM can help investors get an indication of the size of a company’s operations relative to its competitors.

AUM may also be an important consideration for the calculation of fees. Many investment products charge management fees that are a fixed percentage of assets under management. Also, many financial advisors and personal money managers charge clients a percentage of their total assets under management. Typically, this percentage decreases as the AUM increases; in this way, these financial professionals can attract high-wealth investors.

Real-Life Examples of Assets Under Management

When evaluating a specific fund, investors often look at its AUM since it functions as an indication of the size of the fund. Typically, investment products with high AUMs have higher market trading volumes making them more liquid, meaning investors can buy and sell the fund with ease.

SPY

For example, the SPDR S&P 500 ETF (SPY) is one of the largest equity exchange-traded funds on the market. An ETF is a fund that contains a number of stocks or securities that match or mirror an index, such as the S&P 500. The SPY has all 500 of the stocks in the S&P 500 index.

As of Mar. 11, 2022, the SPY had assets under management of $380.7 billion with an average daily trading volume of 113 million shares. The high trading volume means liquidity is not a factor for investors when seeking to buy or sell their shares of the ETF.

EDOW

The First Trust Dow 30 Equal Weight ETF (EDOW) tracks the 30 stocks in the Dow Jones Industrial Average (DJIA). As of Mar. 11, 2022, the EDOW had assets under management of $130 million and much lower trading volume compared to the SPY, averaging approximately 53,000 shares per day. Liquidity for this fund could be a consideration for investors, meaning it could be difficult to buy and sell shares at certain times of the day or week.

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Assignment: Definition in Finance, How It Works, and Examples

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Amsterdam Stock Exchange (AEX) .AS Definition

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What Is an Assignment?

Assignment most often refers to one of two definitions in the financial world:

  1. The transfer of an individual’s rights or property to another person or business. This concept exists in a variety of business transactions and is often spelled out contractually.
  2. In trading, assignment occurs when an option contract is exercised. The owner of the contract exercises the contract and assigns the option writer to an obligation to complete the requirements of the contract.

Key Takeaways

  • Assignment is a transfer of rights or property from one party to another.
  • Options assignments occur when option buyers exercise their rights to a position in a security.
  • Other examples of assignments can be found in wages, mortgages, and leases.

Property Rights Assignment

Assignment refers to the transfer of some or all property rights and obligations associated with an asset, property, contract, etc. to another entity through a written agreement. For example, a payee assigns rights for collecting note payments to a bank. A trademark owner transfers, sells, or gives another person interest in the trademark. A homeowner who sells their house assigns the deed to the new buyer.

To be effective, an assignment must involve parties with legal capacity, consideration, consent, and legality of object.

Examples

A wage assignment is a forced payment of an obligation by automatic withholding from an employee’s pay. Courts issue wage assignments for people late with child or spousal support, taxes, loans, or other obligations. Money is automatically subtracted from a worker’s paycheck without consent if they have a history of nonpayment. For example, a person delinquent on $100 monthly loan payments has a wage assignment deducting the money from their paycheck and sent to the lender. Wage assignments are helpful in paying back long-term debts.

Another instance can be found in a mortgage assignment. This is where a mortgage deed gives a lender interest in a mortgaged property in return for payments received. Lenders often sell mortgages to third parties, such as other lenders. A mortgage assignment document clarifies the assignment of contract and instructs the borrower in making future mortgage payments, and potentially modifies the mortgage terms.

A final example involves a lease assignment. This benefits a relocating tenant wanting to end a lease early or a landlord looking for rent payments to pay creditors. Once the new tenant signs the lease, taking over responsibility for rent payments and other obligations, the previous tenant is released from those responsibilities. In a separate lease assignment, a landlord agrees to pay a creditor through an assignment of rent due under rental property leases. The agreement is used to pay a mortgage lender if the landlord defaults on the loan or files for bankruptcy. Any rental income would then be paid directly to the lender.

Options Assignment

Options can be assigned when a buyer decides to exercise their right to buy (or sell) stock at a particular strike price. The corresponding seller of the option is not determined when a buyer opens an option trade, but only at the time that an option holder decides to exercise their right to buy stock. So an option seller with open positions is matched with the exercising buyer via automated lottery. The randomly selected seller is then assigned to fulfill the buyer’s rights. This is known as an option assignment.

Once assigned, the writer (seller) of the option will have the obligation to sell (if a call option) or buy (if a put option) the designated number of shares of stock at the agreed-upon price (the strike price). For instance, if the writer sold calls they would be obligated to sell the stock, and the process is often referred to as having the stock called away. For puts, the buyer of the option sells stock (puts stock shares) to the writer in the form of a short-sold position.

Example

Suppose a trader owns 100 call options on company ABC’s stock with a strike price of $10 per share. The stock is now trading at $30 and ABC is due to pay a dividend shortly. As a result, the trader exercises the options early and receives 10,000 shares of ABC paid at $10. At the same time, the other side of the long call (the short call) is assigned the contract and must deliver the shares to the long.

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At the Money (ATM): Definition & How It Works in Options Trading

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At the Money (ATM): Definition & How It Works in Options Trading

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What Is At The Money (ATM)?

At the money (ATM) is a situation where an option’s strike price is identical to the current market price of the underlying security. An ATM option has a delta of ±0.50, positive if it is a call, negative for a put.

Both call and put options can be simultaneously ATM. For example, if XYZ stock is trading at $75, then the XYZ 75 call option is ATM and so is the XYZ 75 put option. ATM options have no intrinsic value, but will still have extrinsic or time value prior to expiration, and may be contrasted with either in the money (ITM) or out of the money (OTM) options.

Key Takeaways

  • At the money (ATM) are calls and puts whose strike price is at or very near to the current market price of the underlying security.
  • ATM options are most sensitive to changes in various risk factors, including time decay and changes to implied volatility or interest rates.
  • ATM options are most attractive when a trader expects a large movement in a stock.

Understanding At The Money (ATM)

At the money (ATM), sometimes referred to as “on the money”, is one of three terms used to describe the relationship between an option’s strike price and the underlying security’s price, also called the option’s moneyness.

Options can be in the money (ITM), out of the money (OTM), or ATM. ITM means the option has intrinsic value and OTM means it doesn’t. Simply put, ATM options are not in a position to profit if exercised, but still have value—there is still time before they expire so they may yet end up ITM.

The intrinsic value for a call option is calculated by subtracting the strike price from the underlying security’s current price. The intrinsic value for a put option, on the other hand, is calculated by subtracting the underlying asset’s current price from its strike price.

A call option is ITM when the option’s strike price is less than the underlying security’s current price. Conversely, a put option is ITM when the option’s strike price is greater than the underlying security’s stock price. Meanwhile, a call option is OTM when its strike price is greater than the current underlying security’s price and a put option is OTM when its strike price is less than the underlying asset’s current price.

Special Considerations

Options that are ATM are often used by traders to construct spreads and combinations. Straddles, for instance, will typically involve buying (or selling) both an ATM call and put.

Image by Julie Bang © Investopedia 2019


ATM options are the most sensitive to various risk factors, known as an option’s “Greeks”. ATM options have a ±0.50 delta, but have the greatest amount of gamma, meaning that as the underlying moves its delta will move away from ±0.50 rapidly, and most rapidly as time to expiration nears.

Options trading activity tends to be high when options are ATM. 

ATM options are the most sensitive to time decay, as represented by an option’s theta. Moreover, their prices are most responsive to changes in volatility, especially for farther maturities, and is expressed by an option’s vega. Finally, ATM options are also most sensitive to changes in interest rates, as measured by the rho.

At The Money (ATM) and Near The Money

The term “near the money” is sometimes used to describe an option that is within 50 cents of being ATM. For example, assume an investor purchases a call option with a strike price of $50.50 and the underlying stock price is trading at $50. In this case, the call option is said to be near the money.

In the above example, the option would be near the money if the underlying stock price was trading between about $49.50 and $50.50. Near the money and ATM options are attractive when traders expect a big movement. Options that are even further OTM may also see a jump when a swing is anticipated.

Options Pricing for At The Money (ATM) Options

An option’s price is made up of intrinsic and extrinsic value. Extrinsic value is sometimes called time value, but time is not the only factor to consider when trading options. Implied volatility also plays a significant role in options pricing. 

Similar to OTM options, ATM options only have extrinsic value because they possess no intrinsic value. For example, assume an investor purchases an ATM call option with a strike price of $25 for a price of 50 cents. The extrinsic value is equivalent to 50 cents and is largely affected by the passage of time and changes in implied volatility.

Assuming volatility and the price stay steady, the closer the option gets to expiry the less extrinsic value it has. If the price of the underlying moves above the strike price to $27, the option now has $2 of intrinsic value, plus whatever extrinsic value remains.

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