Asset Turnover Ratio: Definition, Formula, and Analysis


the asset turnover ratio calculated measures

It is the gross sales from a specific period less returns, allowances, or discounts taken by customers. When comparing the asset turnover ratio between companies, ensure the net sales calculations are being pulled from the same period. Generally, a higher ratio is better, indicating that a company efficiently utilizes its assets to generate revenue. However, what constitutes a “good” ratio depends on factors like industry norms, company size, and specific business strategies. In simple terms, the asset turnover ratio means how much revenue you earn based on the total assets.

Higher turnover ratios mean the company is using its assets more efficiently. Lower ratios mean that the company isn’t using its assets efficiently and most likely have management or production problems. The asset turnover ratio is calculated by dividing net sales by average total assets. Depreciation is the allocation of the cost of a fixed asset, which is expensed each year throughout the asset’s useful life.

Total Asset Turnover Calculation Example

  1. Net sales, found on the income statement, are used to calculate this ratio returns and refunds must be backed out of total sales to measure the truly measure the firm’s assets’ ability to generate sales.
  2. Ratio comparisons across markedly different industries do not provide a good insight into how well a company is doing.
  3. Asset turnover can be calculated quarterly, annually, or over any desired period.
  4. Higher turnover ratios mean the company is using its assets more efficiently.

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The asset turnover ratio helps investors understand how effectively companies are using their assets to generate sales. Investors use this ratio to compare similar companies in the same sector or group to determine who’s getting the most out of their assets. The asset turnover ratio is calculated by dividing net sales or revenue by the average total assets.

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Example Calculation of Asset Turnover

A common variation of the asset turnover ratio is the fixed asset turnover ratio. Instead of dividing net sales by total assets, the fixed asset turnover divides net sales by only fixed assets. This variation isolates how efficiently a company is using its capital expenditures, machinery, and heavy equipment to generate revenue. The fixed asset turnover ratio focuses on the long-term outlook of a company as it focuses on how well long-term investments in operations are performing. Sometimes investors also want to see how companies use more specific assets like fixed assets and current assets.

Colgate vs. P&G – battle of Asset Turnover Ratios

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. Asset turnover can be calculated quarterly, annually, or over any desired period. 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. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation.

Investors should review the trend in the asset turnover ratio over time to determine whether asset usage is improving or deteriorating. Rather, in that case, we need to find out the average asset turnover ratio of the respective industries, and then we can compare the ratio of each company. In the realm of financial analysis, the Asset Turnover Ratio plays a critical role.

the asset turnover ratio calculated measures

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Asset turnover ratios vary across different industry sectors, so only the ratios of companies that are in the same sector should be compared. For example, retail or service sector companies have relatively small asset bases combined with high sales volume. Meanwhile, firms in sectors like utilities or manufacturing tend to the asset turnover ratio calculated measures have large asset bases, which translates to lower asset turnover. The asset turnover ratio tells us how efficiently a business is using its assets to generate sales.

It provides significant insights into how efficiently a company uses its assets to generate sales. To calculate the ratio in Year 1, we’ll divide Year 1 sales ($300m) by the average between the Year 0 and Year 1 total asset balances ($145m and $156m). Moreover, the company has three types of current assets—cash and cash equivalents, accounts receivable, and inventory—with the following carrying values recorded on the balance sheet. The asset turnover ratio is most useful when compared across similar companies.

For example, it would be incorrect to compare the ratios of Company A to that of Company C, as they operate in different industries. Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts.


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