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Fixed Asset Turnover: Advanced 1

We can investigate a little bit further, though, as we did with the total asset turnover ratio before we can make our final assessment. However, we need to look at which of the fixed assets have increased so much in case it's not as simple as it might look:

Whilst tangible fixed assets such as land, buildings, machinery and so on have doubled and investments have quadrupled, the largest increase of all is in intangible assets. The notes to the financial statements in the Carphone Warehouse's annual report shows us that the majority of the intangible asset came from the goodwill arising from having bought the rest of the shares in a business in which it already had a 76% holding in. Here are those notes:

Acquisition of minority interests in the Group
On 22 June 2000, the Company acquired 24% of the issued share capital of The Phone House Holdings (UK) Limited, a company registered England in which it already had a 76% interest, in exchange for 81.9m shares in the Company. The shares in the Company had a fair value of £104.1m, giving rise to goodwill on acquisition of £105.9m. On 14 July 2000, the Company acquired all minority interests in The Phone House SA (France), Phone Warehouse SL (Spain) and Polirent Comercio e Aluguer de Bens e Servicos LDA (Portugal), in exchange for 31.3m shares in the Company. The shares in the Company had a fair value of £62.5m, giving rise to goodwill on acquisition of £63.1m.

The Carphone Warehouse's accounting policy on goodwill is:

Intangible assets - goodwill
Goodwill arising on the acquisition of subsidiary undertakings and businesses, representing any excess of the fair value of the consideration given over the fair value of the identifiable assets and liabilities acquired, is capitalised and written off on a straight line basis over its useful economic life of 20 years.

Source: Carphone Warehouse Annual Report - page 30 [PDF]

Let's adjust for the goodwill. For 2001 let's take out all £169,050,000 of it and see the impact that has on the fixed asset turnover ratio.

Good, now the change is not so dramatic - it has fallen by only 30% now. Still fixed assets have changed at a quicker rate than turnover so we are still looking for improvements next year.

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