How to Calculate Total Asset Turnover Ratio

Company A reported beginning total assets of $199,500 and ending total assets of $199,203. Over the same period, the company generated sales of $325,300 with sales returns of $15,000. The average total assets can be found by adding the beginning assets to the ending assets and dividing this sum by two. Asset turnover ratio results that are higher indicate a company is better at moving products to generate revenue.

This would indicate that the company is generating $2 in net sales for every $1 of assets it has. The asset turnover ratio is an important measure of a company’s performance because it indicates how well the company is using its assets to generate sales. A high asset turnover ratio indicates that a company is effectively using its assets to generate revenue, while a low asset turnover ratio may indicate that a company is not using its assets efficiently.

However, this depends on the average asset turnover ratio of the industry to which the company belongs. If the company’s industry has an asset turnover that is less than 0.5 in most cases and this company’s ratio is 0.9; then the company is doing well, irrespective of its low asset turnover. Nevertheless, it is important to note that asset turnover ratios vary throughout different sectors due to the varying nature of different industries. For instance, low-margin industries usually tend to have a higher asset turnover ratio compared to other industries. Therefore, it wouldn’t make sense to compare this ratio for businesses in different sectors. In the retail sector, an asset turnover ratio of 2.5 or more could be considered good, while a company in the utilities sector is more likely to aim for an asset turnover ratio that’s between 0.25 and 0.5.

Asset Turnover Ratio: Meaning, Formula, Calculation, Example, Interpretation

Ratio comparisons across markedly different industries do not provide a good insight into how well a company is doing. For example, it would be incorrect to compare the ratios of Company A to that of Company C, as they operate in different industries. In this equation, the beginning assets are the total assets documented at the start of the fiscal year, and the ending assets are the total assets documented at the end of the fiscal year.

XYZ has generated almost the same amount of income with over half the resources as ABC. Its total assets were $3 billion at the beginning of the fiscal year and $5 billion at the end. Assuming the company had no returns for the year, its net sales for the year was $10 billion.

Interpreting the Asset Turnover Ratio

First, it assumes that additional sales are good, when in reality the true measure of performance is the ability to generate a profit from sales. Second, the ratio is only useful in the more capital-intensive industries, usually involving the production of goods. A services industry typically has a far smaller asset base, which makes the ratio less relevant.

A fixed asset is a resource that has been purchased by the company with the intent of long-term use, such as land, buildings and equipment. Depreciation is the allocation of the cost of a fixed asset, which is spread out—or expensed—each year throughout the asset’s useful life. Typically, a higher fixed asset turnover ratio indicates that a company has more effectively utilized its investment in fixed assets to generate revenue. This the asset turnover ratio calculated measures ratio can be used to compare companies within the same industry, or to compare a company’s performance over time. Hence, it would not make sense to compare the asset turnover ratios for Walmart and AT&T, since they operate in very different industries. Therefore, comparing the asset turnover ratios for AT&T with Verizon is acceptable and provides a better estimate of which company is using its assets more efficiently in the industry.

How Is Asset Turnover Calculated?

The asset turnover ratio is a financial ratio that measures the percentage of revenue or sales generated relative to the value of assets. The asset turnover ratio may be used as a measure of a company’s efficiency in utilizing its assets to generate income. This ratio is used as a financial indicator which tells the efficiency of a company in the management of its assets. It is used to know the level of the assets’ rotation to identify the shortcomings and then enact improvements to maximize the use of the company’s resources. The Asset Turnover Ratio is calculated by taking the net turnover amount and then dividing it by the total assets.

• The higher your company’s asset turnover ratio, the more efficient it is at generating revenue from assets.
• The higher the ratio, the more efficient the company is in generating sales from its assets.
• The asset turnover ratio is an important measure of a company’s performance because it indicates how well the company is using its assets to generate sales.

Similarly, selling off assets to prepare for declining growth will artificially inflate the asset turnover ratio. In addition, several other factors such as seasonality can affect the asset turnover ratio of a company during accounting periods shorter than a year. Assume, Techbuddy is a tech start-up company that manufactures a new tablet computer. Say, the owner of the company is currently looking for new investors and has a meeting with an angel investor. The investor wants to know how well the company uses its assets to produce sales, so he asks for the company’s financial statements and highlights the items needed to evaluate the company’s efficiency.

Formula and Calculation of the Asset Turnover Ratio

Also, compare it to the same ratio for competitors, which can indicate which other companies are being more efficient in wringing more sales from their assets. While the asset turnover ratio is a beneficial tool for determining the efficiency of a company’s asset use, it does not provide all the detail that would be helpful for a full stock analysis. The asset turnover ratio may be artificially deflated when a company makes large asset purchases in anticipation of higher growth. Likewise, selling off assets to prepare for declining growth will artificially inflate the ratio.

• The asset turnover ratio measures a company’s ability to generate sales from its assets.
• ABC Corporation reported net sales of $1,000,000 for the year, and its average total assets amounted to $500,000.
• Companies can make informed decisions about their operations and financial performance by examining their asset turnover ratios and comparing them to industry benchmarks and other financial metrics.
• Also, changing depreciation methods for fixed assets can have a similar effect on the asset turnover ratio because it will change the accounting value of the firm’s assets.

But comparing the relative asset turnover ratios for AT&T compared with Verizon may provide a better estimate of which company is using assets more efficiently in that industry. The higher the asset turnover ratio, the more efficient a company is at generating revenue from its assets. Conversely, if a company has a low asset turnover ratio, it indicates it is not efficiently using its assets to generate sales. If the asset turnover ratio is less than 1, it is not considered good for the company as it indicates that the company’s total assets cannot produce enough revenue at the end of the year.

How to improve the asset turnover ratio

Thus, a sustainable balance must be struck between being efficient while also spending enough to be at the forefront of any new industry shifts. On the flip side, a turnover ratio far exceeding the industry norm could be an indication that the company should be spending more and might be falling behind in terms of development. Over time, positive increases in the turnover ratio can serve as an indication that a company is gradually expanding into its capacity as it matures (and the reverse for decreases across time). What may be considered a “good” ratio in one industry may be viewed as poor in another.

Hence, it is often used as a proxy for how efficiently a company has invested in long-term assets. The metric falls short, however, in being distorted by significant one-time capital expenditures (Capex) and asset sales. This ratio varies by industry, but a good asset turnover ratio is typically above 2.5 or more. Financial ratios are used by the creditors, investors and other stakeholders to assess the company in terms of its ability to pay obligations, viable for investments decisions and opportunities, among others.

The asset turnover ratio relates to how effectively a firm generates revenue from its assets. Theoretically, a company with no debt should have an asset turnover ratio of 1.0 (that is, sales equal to assets). However, in practice, companies usually have some debt, so their asset turnover ratios are usually less than 1.0. When you get the beginning and ending value figures, add them and divide them by 2 to get the average total asset value for the year. After that, locate the company’s total sales on its income statement which could be listed also as Revenue.

The asset turnover ratio tends to be higher for companies in certain sectors than in others. Retail and consumer staples, for example, have relatively small asset bases but have high sales volume—thus, they have the highest average asset turnover ratio. Conversely, firms in sectors such as utilities and real estate have large asset bases and low asset turnover.