How to set value for Tangible assets / net sales %?

How to choose percentage value?

Normally companies need certain amount of tangible assets relative to their turnover. In many industries this proportion is quite constant in the long-run. For example a pulp & paper company might have had fixed assets about 85% of its sales and the proportion has alternated between 81% and 89% for the past ten years.

Simplified this means that the company needs to have a paper machine worth 850 mEUR in order to generate 1000 mEUR sales in one year. Thereby it is very unlikely that the proportion of fixed (tangible) assets would change much relative to sales either in the future. Therefore it is quite logical basis for the estimates that the relation between tangible assets and net sales would remain roughly at the same level also in the future.

Estimates in Valuatum Excel model

In Valuatum Excel model Tangible assets / Net sales are estimates in I-main sheet in section Balance sheet parameters. There you can see what it has been in the history and based on this you can make the estimates for the future. If you have not estimated investments with tangible assets in absolute terms, the Tangible assets / Net sales parameter will adjust the investments automatically.

Differences inside of industry

Often the Tangible assets / Net sales ratio is rather constant even inside a certain industry, so competitors would have pretty similar relation between tangible assets and sales. Of course it is normal to have some differences inside the same industry. Some other pulp & paper company might have e.g. proportionally bigger share of certain product types (like: fine papers, tissue papers etc.) and the different products tie capital differently in production assets.

Furthermore different companies might have different philosophy in these issues and therefore two companies with exactly same businesses might have different "asset turnover". Others tend to use their old machinery as long as possible and others tend to keep their production facility very modern. Thus the latter group might have more efficient production capacity and also smaller variable costs but higher depreciation percentage.

Fine tuning

As you have set the parameter (Tangible asset / Net sales) roughly at the right level, you can (and often also should) do some alteration to either this parameter or directly to investments. It is often so that at least current year values are easier to estimate directly with absolute investments as we often know what kind of investment plans the company has for the current year.

If you estimate only with the Tangible asset / Net sales parameter, you should also take into account cyclical factors (capacity utilisation is different over the cycle and it affects Tangible asset / Net sales) and possible changes in group structure (relative share of certain business in the group might be changing).