Asset Turnover Ratio

What Is the Asset Turnover Ratio?

The asset turnover ratio compares the value of a company’s sales or revenues to its assets. The asset turnover ratio can be used to determine how efficiently a company uses its assets to generate revenue. To gain further information about cgtmse, click here.

The greater a company’s asset turnover ratio, the more efficient it is at generating revenue from its assets. In contrast, a low asset turnover ratio indicates that a company is not efficiently using its assets to generate sales.

Key Takeaways

• The ratio of total sales or revenue to average assets is known as asset turnover
• This metric informs investors about how effectively companies use their assets to generate sales
• The asset turnover ratio is used by investors to compare similar companies in the same industry or group
• Large asset sales and significant asset purchases in a given year can have an impact on a company’s asset turnover ratio.

Formula and Calculation of the Asset Turnover Ratio

The denominator of the asset turnover ratio is the value of a company’s assets. The average value of a company’s assets for the year must first be calculated in order to determine the value of its assets.

1. Find the value of the company’s assets on the balance sheet at the beginning of the year.
2. Find the final balance or value of the company’s assets at the end of the fiscal year.
3. Divide the sum of the beginning and ending asset values by two to get the average value of the assets for the year.
4. On the income statement, look for total sales (which may be listed as revenue).
5. Divide total sales or revenue by the year’s average asset value.

What the Asset Turnover Ratio Can Tell You

The asset turnover ratio is typically calculated on an annual basis. The higher the asset turnover ratio, the better the company performs. Because higher ratios indicate that the company generates more revenue per dollar of assets.

Companies in certain industries have a higher asset turnover ratio than others. Retail and consumer staples, for example, have small asset bases but high sales volume, resulting in the highest average asset turnover ratio. Firms in sectors such as utilities and real estate, on the other hand, have large asset bases and low asset turnover.

Comparing the asset turnover ratios of a retail company and a telecommunications company would be ineffective.

The Difference Between Asset Turnover and Fixed Asset Turnover

While the asset turnover ratio takes into account average total assets in the denominator, the fixed asset turnover ratio only takes into account fixed assets. Analysts typically use the fixed asset turnover ratio (FAT) to assess operating performance.

This efficiency ratio compares net sales (income statement) to fixed assets (balance sheet) and assesses a company’s ability to generate net sales from its fixed-asset investments, which include property, plant, and equipment (PP&E).

The fixed asset balance is used after depreciation has been deducted. Depreciation is the process by which the cost of a fixed asset is spread out—or expensed—each year over the asset’s useful life. A higher fixed asset turnover ratio typically indicates that a company has used its fixed asset investment more effectively to generate revenue.

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