# Asset Turnover Ratio: Definition, Formula, and Analysis

Just-in-time (JIT) inventory management, for instance, is a system whereby a firm receives inputs as close as possible to when they are actually needed. So, if a car assembly plant needs to install airbags, it does not keep a stock of airbags on its shelves, but receives them as those cars come onto the assembly line. While the asset turnover ratio should be used to compare stocks that are similar, the metric does not provide all of the detail that would be helpful for stock analysis. It is possible that a company’s asset turnover ratio in any single year differs substantially from previous or subsequent years.

For instance, if the total turnover of a company is 1.0x, that would mean the company’s net sales are equivalent to the average total assets in the period. On the other hand, a low asset turnover ratio could indicate inefficiency in using assets, suggesting problems with the company’s inventory management, sales generation, or asset acquisition strategies. It could also mean that the company is asset-heavy and may not be generating adequate revenue relative to the assets it owns. It provides significant insights into how efficiently a company uses its assets to generate sales. The asset turnover ratio is concerned with how efficiently a company is using its assets to generate sales.

## How to calculate the asset turnover ratio

The standard asset turnover ratio considers all asset classes including current assets, long-term assets, and other assets. Since this ratio can vary widely from one industry to the next, comparing the asset the asset turnover ratio calculated measures turnover ratios of a retail company and a telecommunications company would not be very productive. Comparisons are only meaningful when they are made for different companies within the same sector.

Watch this short video to quickly understand the definition, formula, and application of this financial metric. All of these categories should be closely managed to improve the asset turnover ratio. In our hypothetical scenario, the company has net sales of $250m, which is anticipated to increase by $50m each year. Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more.

## Examples of Asset Turnover Ratio Formula (With Excel Template)

The asset turnover ratio measures the efficiency of a company’s assets in generating revenue or sales. It compares the dollar amount of sales (revenues) to its total assets as an annualized percentage. Thus, to calculate the asset turnover ratio, divide net sales or revenue by the average total assets.

In other words, the company is generating 1 dollar of sales for every dollar invested in assets. The ratio measures the efficiency of how well a company uses assets to produce sales. Conversely, a lower ratio indicates the company is not using its assets as efficiently. Same with receivables – collections may take too long, and credit accounts may pile up. Fixed assets such as property, plant, and equipment (PP&E) could be unproductive instead of being used to their full capacity.

A high value of the ratio means that the productivity of the assets in generating sales is also high and so is the profitability of the business. The asset turnover ratio formula is used to calculate and measure how efficiently the assets of a company are used to generate revenue or sales. In as much as the asset turnover ratio formula should be used to compare similar companies, when it comes to stock analysis the metric does not provide all the necessary and helpful details. But working capital doesn’t just include cash flow, it also includes all the assets that are available to cover operational expenses or business costs. Total asset turnover ratio is a great way to measure your company’s ability to use assets to generate sales.

## Showcasing an Understanding of the Asset Turnover Ratio on Your Resume

The efficiency of a company can be analyzed by tracking the company’s asset turnover ratio over time. As the company grows, the asset turnover ratio measures how efficiently the company is expanding over time, especially when compared to its competitors. As the total revenue of a company is increasing, the asset turnover ratio can still identify whether the company is becoming more or less efficient at using its assets effectively to generate profits. The asset turnover ratio measures how effectively a company uses its assets to generate revenue or sales. The ratio compares the dollar amount of sales or revenues to the company’s total assets to measure the efficiency of the company’s operations.

Below are the steps as well as the formula for calculating the asset turnover ratio. For our third example, we will be calculating the asset turnover ratio for Nestle, one of the world’s largest food and beverage companies. For Year 1, we’ll divide Year 1 sales ($300m) by the average between the Year 0 and Year 1 PP&E balances ($85m and $90m), which comes out to a ratio of 3.4x. For the final step in listing out our assumptions, the company has a PP&E balance of $85m in Year 0, which is expected to increase by $5m each period and reach $110m by the end of the forecast period.

## How to Calculate the Asset Turnover Ratio?

Then, locate the ending balance or value of the company’s assets at the end of the year. For example, an asset turnover ratio of 0.5 would mean that each dollar of the company’s assets generates 50 cents of sales. An asset turnover ratio formula compares the total amount of a company’s net sales in dollar amount to the total amount of asset that was utilized to generate the stated amount of net sales. Hence, the asset turnover ratio is a ratio that compares a company’s net sales to the total assets through which this sale was generated. This metric is used to measure how efficiently the assets of a company are deployed to generate revenue or sales.

- Therefore, the asset turnover ratio is an essential component of DuPont analysis, which provides a comprehensive understanding of a company’s financial performance.
- A higher ratio indicates better utilization of fixed assets to generate sales revenue.
- That is, if a company has a low asset turnover ratio, it may be an indication that it is not efficiently using its assets to generate sales.
- This can be done by plotting the data points on a trend line, allowing any patterns or gradual increases and decreases to be observed.
- Other sectors like real estate often take long periods of time to convert inventory into revenue.
- The ratio is typically calculated on an annual basis, though any time period can be selected.

Typically, total asset turnover ratio is calculated on an annual basis, although if needed it can be calculated over a shorter or longer timeframe. This ratio measures a company’s ability to generate sales from its assets and is a good indicator of how efficiently a company is using its assets to generate revenue. A higher asset turnover ratio indicates that a company is generating more sales from its assets and is, therefore more efficient.

## What’s an Example of an Asset Turnover Ratio?

It suggests that the company is effectively deploying its long-term assets to drive revenue generation. However, a very high ratio could also indicate underinvestment in fixed assets, which may impact future growth prospects or operational capacity. This result indicates that, on average, the company generates $2 in sales revenue for every $1 invested in assets during the year. A high ratio suggests efficient asset utilization, indicating that ABC Corporation effectively generates revenue relative to its asset base.

The asset turnover ratio can be used to compare different companies, or to compare a company’s performance over different time periods. The ratio can also be used to identify potential areas where a company could improve its efficiency. Total assets refer to the total value of all of a company’s physical and financial assets. Physical assets include things like machinery, equipment, and real estate, while financial assets include things like cash, investments, and accounts receivable. Total assets are an important measure of a company’s financial position because they reflect the total value of the resources that the company has available to generate revenue and profits. Industries with low profit margins tend to generate a higher ratio and capital-intensive industries tend to report a lower ratio.

We can see that Company B operates more efficiently than Company A. This may indicate that Company A is experiencing poor sales or that its fixed assets are not being utilized to their full capacity. The asset turnover ratio for each company is calculated as net sales divided by average total assets. A higher ratio indicates efficient utilization of fixed and current assets to generate sales. However, as with any ratio, it’s essential to consider industry benchmarks and company-specific factors for a meaningful interpretation. A higher ratio indicates better utilization of fixed assets to generate sales revenue.

Average total assets is the denominator in the formula for asset turnover ratio, which is gotten by taking the average of the beginning and ending assets of the period being analyzed. The standard asset turnover ratio formula considers all types of assets such as current assets, fixed assets, and other assets. The inventory turnover ratio is a financial ratio that measures the number of times a company’s inventory is sold and replaced over a period of time. This ratio is calculated by dividing a company’s cost of goods sold by its average inventory.

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The total asset turnover ratio should be used in combination with other financial ratios for a comprehensive analysis. The asset turnover ratio is calculated by dividing net sales by average total assets. The ratio measures the ability of an organization to efficiently produce sales, and is typically used by third parties to evaluate the operations of a business.