A higher ratio shows that a business is getting more revenue from existing assets. Importance of the Asset Turnover RatioĪ ratio that measures efficiency is important as it shows a company’s ability to utilize its assets to make sales revenue. ExampleĪt the beginning of a company, the assets were $100000 and $150000 at the end of the year. The asset turnover ratio is calculated on an annual basis. The company’s average total assets are the average of both long-term and short-term assets for the past two years recorded on its balance sheet. Net sales are the amount generated by a business after discounts, allowances for missing goods or damaged, and cost of returns. The total assets and revenue generated are found on the balance sheet and income statement, respectively.Īsset Turnover Ratio = Total Sales / Average Total Assets It is calculated by taking the net sales and dividing it by the company’s average total assets. A high asset turnover may be seen in companies with older assets compared to a company with the same revenue but is new. The age of the assets in two similar companies will affect their asset turnover ratio. If a company has a total asset turnover ratio 0f 0.7, 70 cents are generated for each dollar of assets invested. It computes the net sales as a percentage of assets to show how much each dollar of a company’s assets generates revenue.
If the ratio is high, performance is good. The ratio can be used to determine a company’s performance. Alternatively, "Average Total Assets" can be ending total assets.The asset turnover ratio is an essential financial ratio used to understand how effective a company is at using its assets to create revenue.For such businesses it is advisable to use some other formula for Average Total Assets. This method can produce unreliable results for businesses that experience significant intra-year fluctuations. It is calculated by adding up the assets at the beginning of the period and the assets at the end of the period, then dividing that number by two. "Average Total Assets" is the average of the values of "Total assets" from the company's balance sheet in the beginning and the end of the fiscal period."Sales" is the value of "Net Sales" or "Sales" from the company's income statement.Companies in the retail industry tend to have a very high turnover ratio due mainly to cutthroat and competitive pricing.Īsset Turnover = Net Sales Revenue / Average Total Assets Ĭompanies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover. As a financial and activity ratio, and as part of DuPont analysis, asset turnover is a part of company fundamental analysis. Total asset turnover ratios can be used to calculate Return On Equity (ROE) figures as part of DuPont analysis. Asset turnover can be further sub-divided into fixed asset turnover, which measures a company's use of its fixed assets to generate revenue, and working capital turnover, which measures a company's use of its current assets minus liabilities to generate revenue. Asset turnover is considered to be a Profitability Ratio, which is a group of financial ratios that measure how efficiently a company uses assets. Asset turnover ( ATO), total asset turnover, or asset turns is a financial ratio that measures the efficiency of a company's use of its assets in generating sales revenue or sales income to the company.
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