Discussion Fixed Asset Turnover Ratio Bed Bath & Beyond Inc

Discussion Fixed Asset Turnover Ratio Bed Bath Beyond Incbed

Discussion Fixed Asset Turnover Ratio Bed Bath Beyond Incbed

Analyze how the fixed-asset turnover ratio of Bed Bath & Beyond, Inc. is calculated using its 2011 financial data. Discuss the interpretation of a ratio of 7.8355 in this context. Based on the provided data, determine Bed Bath & Beyond's net sales for 2011.

Paper For Above instruction

The fixed asset turnover ratio is a crucial indicator of a company's efficiency in using its property, plant, and equipment (PP&E) to generate sales. It is calculated by dividing net sales by the average book value of PP&E during a specific period. For Bed Bath & Beyond, Inc., the calculation of this ratio in 2011 involves understanding the components of PP&E, depreciation, sales data, and the precise formula involved.

Calculation of Fixed Asset Turnover Ratio

The formula for the fixed asset turnover ratio is:

Fixed Asset Turnover Ratio = Net Sales / Average Book Value of PP&E

The average book value of PP&E for 2011 is computed as:

Average PP&E = (Beginning PP&E + Ending PP&E) / 2

However, because of transactions like purchases, depreciation, and sales, the ending book value of PP&E must be accurately calculated.

Starting with the beginning book value of PP&E at the start of 2011, which was $1,119,292 thousand, and adding the purchases of $183,474 thousand during 2011, the gross amount before considering depreciation and sales is:

Gross PP&E (before depreciation & sales) = $1,119,292 + $183,474 = $1,302,766 thousand

During 2011, depreciation expense was $183,820 thousand, reducing the book value, and equipment with a book value of $2,649 thousand was sold. This sale affects the calculation of the ending book value.

To find the ending book value of PP&E, we adjust the gross amount by deducting the accumulated depreciation and the book value of sold equipment:

Ending PP&E = Gross PP&E - Depreciation Expense - Book Value of Sold Equipment

Thus, the ending PP&E is:

Ending PP&E = $1,302,766 - $183,820 - $2,649 = $1,116,297 thousand

Now, the average book value of PP&E for 2011 is: 

Average PP&E = ($1,119,292 + $1,116,297) / 2 = $1,117,794.50 thousand

Interpretation of the Ratio of 7.8355

A fixed asset turnover ratio of 7.8355 implies that for every dollar invested in PP&E, Bed Bath & Beyond generated approximately $7.84 in sales during 2011. This indicates a high level of efficiency in utilizing fixed assets to produce sales. Typically, higher ratios suggest effective asset management and operational efficiency; however, the context of industry standards must also be considered. Retailers like Bed Bath & Beyond often operate with significant fixed assets, but a ratio nearing 8 signifies strong asset utilization.

Calculating Net Sales for 2011

Given the fixed asset turnover ratio and the average PP&E, net sales can be deduced:

Net Sales = Fixed Asset Turnover Ratio × Average PP&E
Net Sales = 7.8355 × $1,117,794.50 ≈ $8,759,982,523.75

Therefore, Bed Bath & Beyond's net sales for 2011 are approximately $8.76 billion.

Conclusion

The calculation of the fixed asset turnover ratio provides valuable insights into the company's operational efficiency. A ratio of 7.8355, in this context, signifies strong utilization of fixed assets to generate sales. The detailed calculation using the provided financial data confirms this high efficiency, with net sales around $8.76 billion for 2011. Such insights help investors and management assess how well the company is managing its assets relative to its sales performance.

References

  • Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.
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  • Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management. Cengage Learning.
  • Bed Bath & Beyond Inc. (2011). Annual Report. Retrieved from [Company Website]
  • Investopedia. Fixed Asset Turnover Ratio. Retrieved from https://www.investopedia.com/terms/f/fixedassetturnover.asp
  • SEC Filings. (2011). Form 10-K for Bed Bath & Beyond Inc. Retrieved from SEC EDGAR database.
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