Description: This measurement is based solely on information in the balance sheet. It is designed for use by managers to determine which assets can be safely eliminated from a company without impairing its operational capabilities. Its intent is to focus management attention on those assets that are not generating a return on investment, so that they can be eliminated.
Formula: Divide the dollar value of all assets used in the revenue creation process by the total amount of assets. Both of these numbers should be recorded at their gross values, prior to any depreciation deduction. The calculation can also include accounts receivable and inventory. The formula is as follows:
Assets Used to Create Revenue
Total Assets
Cautions: The derivation of the asset list used for the numerator is highly subjective. Unless the measurement is backed up with a rigorous selection system to determine which assets are truly being used for productive activities, it is likely that some assets will be included in the numerator that should not be there. Also, the concept of asset usage to create revenue can create gray areas – for example, should any equipment used by the sales department be itemized as part of the revenue creation process? The best way to deal with these issues is to create a detailed list of what asset classes should be included in the measurement, which may also require a written justification for the inclusion of specific assets in the numerator of the formula.