One ratio that businesses of all sizes may find helpful is the asset turnover ratio. The asset turnover ratio measures how efficiently a business uses their assets to create sales. Learn what this ratio measures and how the information calculated can help your business. This ratio measures how efficiently a firm uses its assets to generate sales, so a higher ratio is always more favorable.

Balance Sheet Assumptions

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. You’ll simply need the total net sales for the period in which you’re calculating the ratio and your total average assets for the period. While that’s simple enough, the results provided by the asset turnover ratio can provide an insight into your business operations that can directly affect future decision-making. The total asset turnover ratio calculates net sales as a percentage of assets to show how many sales are generated from each dollar of company assets. For instance, a ratio of .5 means that each dollar of assets generates 50 cents of sales.

Module 15: Financial Statement Analysis

In other words, this company is generating $1.00 of sales for each dollar invested into all assets. A high total asset turnover means that the company is able to generate more revenue per unit asset. On the other hand, a low total asset turnover suggests that the company is unable to generate satisfactory results with the asset it has in hand. Being able to assess a company’s efficiency is one of the main steps when analyzing investment opportunities. Hence, it is vital for investors to understand the calculation using the total asset turnover formula.

Formula for Calculating Asset Turnover Ratio

The average value of the assets for the year is determined using the value of the company’s assets on the balance sheet as of the start of the year and at the end of the year. using the information shown here, which of the following is the asset turnover ratio? Total sales or revenue is found on the company’s income statement and is the numerator. The ratio measures the company’s efficiency in managing its assets to generate revenue.

Fixed assets such as property, plant, and equipment (PP&E) could be unproductive instead of being used to their full capacity. It is only appropriate to compare the asset turnover ratio of companies operating in the same industry. 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. If you’re using accounting software, you can find these numbers on your income statement and balance sheet.

• Over the same period, the company generated sales of $325,300 with sales returns of $15,000.
• We will also show you some real-life examples to better help you to understand the concept.
• The asset turnover ratio should be used to compare stocks that are similar and should be used in trend analysis to determine whether asset usage is improving or deteriorating.
• Average total assets are usually calculated by adding the beginning and ending total asset balances together and dividing by two.
• Companies with newer assets that haven’t fully depreciated have a lower ratio than a similar company with older assets.
• To reiterate from earlier, the average turnover ratio varies significantly across different sectors, so it makes the most sense for only ratios of companies in the same or comparable sectors to be benchmarked.
• This result indicates that Don’s business is not using its assets efficiently.

This ratio looks at the value of most of a company’s assets and how well they are leveraged to produce sales. The goal of owning the assets is to generate revenue that ultimately results in cash flow and profit. Generally, a high total asset turnover is better as it means the company can generate more revenue per asset base. A low total asset turnover means that the company is less efficient in using its asset to generate revenue. The following article will help you understand what total asset turnover is and how to calculate it using the total asset turnover ratio formula.

The total asset turnover ratio is a general efficiency ratio that measures how efficiently a company uses all of its assets. This gives investors and creditors an idea of how a company is managed and uses its assets to produce products and sales. The value of a company’s total assets includes the value of its fixed assets, current assets, accounts receivable, and liquid assets (cash).

While the asset turnover ratio considers average total assets in the denominator, the fixed asset turnover ratio looks at only fixed assets. The fixed asset turnover ratio (FAT) is, in general, used by analysts to measure operating performance. This efficiency ratio compares net sales (income statement) to fixed assets (balance sheet) and measures a company’s ability to generate net sales from property, plant, and equipment (PP&E). A higher fixed asset turnover ratio indicates that a company has more effectively utilized its investment in fixed assets to generate revenue. The asset turnover ratio considers the average total assets in the denominator, while the fixed asset turnover ratio looks at only fixed assets. The fixed asset turnover ratio (FAT ratio) is used by analysts to measure operating performance.

Asset Turnover vs. Fixed Asset Turnover

• Investors and analysts can use this measure to compare similar companies to know how efficiently they use their assets.
• 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.
• On the other hand, Telecommunications, Media & Technology (TMT) may have a low total asset turnover due to their high asset base.
• Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.

Sometimes, investors and analysts are more interested in measuring how quickly a company turns its fixed assets or current assets into sales. In these cases, the analyst can use specific ratios, such as the fixed-asset turnover ratio or the working capital ratio to calculate the efficiency of these asset classes. The working capital ratio measures how well a company uses its financing from working capital to generate sales or revenue. The asset turnover ratio measures the efficiency of a company’s assets in generating revenue or sales. It compares the dollar amount of sales 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.