Asset Turnover

This component of the DuPont Model looks at the productivity of your assets to generate revenue. Asset turnover judges the ability of your assets to produce revenue. Many mergers are predicated on cleaning up the balance sheet of the acquired company. This is a euphemism for selling off assets that do not produce revenue. Assume that you are getting a good price for a company, but it will reduce your asset turnover from 4 to 3.5. The impact to ROA is illustrated in Exhibit 7-5.

Exhibit 7-5: Effect of a decrease in asset turnover on return on assets.

	Cash Flow Margin		Asset Turnover	=	Adjusted ROA
Your Company	12%		4	=	48%
Combined Companies	12%		3.5	=	42%

The result is a drop of 6 percent in ROA. The question you need to ask is: Can you sell the assets off, or will they remain on your balance sheet?