In forecasting PP&E, which ratio is used to project capital expenditures based on historical performance?

In forecasting PP&E, which ratio is used to project capital expenditures based on historical performance?

• A. Capital asset turnover ratio
• B. Gross margin ratio
• C. Quick ratio
• D. Debt-to-equity ratio

Answer: (A)

Forecasting CapEx hinges on how much asset base is required to support expected sales. The capital asset turnover ratio captures how efficiently PP&E turns into revenue, calculated as Sales divided by Net PP&E. By using this relationship, you can translate forecasted sales into a target level of PP&E (Target PP&E = Forecasted Sales / Capital Asset Turnover). Then, using the accounting identity Ending PP&E = Beginning PP&E + CapEx − Depreciation, you compute CapEx as CapEx = Ending PP&E − Beginning PP&E + Depreciation. This directly ties past asset use to future investment needs, making it the best tool for projecting CapEx from historical performance. Other ratios don’t fit this purpose: gross margin measures profitability, quick ratio assesses liquidity, and debt-to-equity looks at financing structure, none of which directly link CapEx to the asset base needed to support forecasted sales.

Forecasting CapEx hinges on how much asset base is required to support expected sales. The capital asset turnover ratio captures how efficiently PP&E turns into revenue, calculated as Sales divided by Net PP&E. By using this relationship, you can translate forecasted sales into a target level of PP&E (Target PP&E = Forecasted Sales / Capital Asset Turnover). Then, using the accounting identity Ending PP&E = Beginning PP&E + CapEx − Depreciation, you compute CapEx as CapEx = Ending PP&E − Beginning PP&E + Depreciation. This directly ties past asset use to future investment needs, making it the best tool for projecting CapEx from historical performance.

Other ratios don’t fit this purpose: gross margin measures profitability, quick ratio assesses liquidity, and debt-to-equity looks at financing structure, none of which directly link CapEx to the asset base needed to support forecasted sales.