Asset Turnover Ratio: Definition, Formula & Examples

asset turnover formula

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). The turnover metric falls short, however, in being distorted by significant one-time capital expenditures (Capex) and asset sales. Watch this short video to quickly understand the definition, formula, and application of this financial metric.

We’ll show you how to calculate the asset turnover ratio equation, and why it’s important to understand this accounting term. Asset turnover ratio is one of the most crucial business stats and accounting formulas to know. Plus, the asset turnover ratio can come in handy when you’re looking into business funding. There is no single number that represents a good total asset turnover ratio, because each industry has different business models.

What is Asset Turnover Ratio?

The asset turnover ratio is an efficiency ratio that measures a company’s ability to generate sales from its assets by comparing net sales with average total assets. In other words, this ratio shows how efficiently a company can use its assets to generate sales. The asset turnover ratio, also known as the total asset turnover ratio, measures the efficiency with which a company uses its assets to produce sales. The asset turnover ratio formula is equal to net sales divided by the total or average assets of a company.

asset turnover formula

A higher ratio indicates a company is turning assets into cash flows that help grow the company’s revenue and bottom line. To improve a low ATR, a company can take measures like stocking popular items, restocking inventory when needed, and extending operating hours to attract more customers and boost sales. Gearing relates to an organisation’s relative levels of debt and equity and can help to measure its ability to meet its long-term debts. These ratios are sometimes known as risk ratios, positioning ratios or solvency ratios. The FMA/MA syllabus introduces candidates to performance measurement and requires candidates to be able to ‘Discuss and calculate measures of financial performance and non-financial measures’. This article will focus on measures of financial performance and will detail the skills and knowledge expected from candidates in the FMA/MA exam.

Interpretation of the Asset Turnover Ratio

The assets at the beginning and end of the year are shown on the balance sheet. 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). The ratio is meant to isolate how efficiently the company uses its fixed asset base to generate sales (i.e., capital expenditures).

A higher ratio is generally better, indicating that the company is more efficient in utilizing its assets. Conversely, a lower ratio might suggest inefficiency, perhaps due to underutilization of assets or the presence of idle or obsolete assets. It would require additional analysis and insight into how each company’s ratios are performing over time, and whether they have higher or lower ratios than their direct competitors.

Uses and Users of Financial Ratios

It does so by comparing the rupee amount of sales or revenues to the total assets of the company. This financial ratio provides valuable insights into how effectively the company’s operations utilize its assets to drive its revenue generation. You can locate your net sales number on your income statement (also known as your profit and loss statement). This is your total sales number, minus any returns, damaged goods, missing goods, etc. Rather than gross sales, your net sales is the more accurate figure to use when you’re generating your asset turnover ratio.

Leave a Comment

Your email address will not be published. Required fields are marked *