The asset turnover ratio refers to the group of efficiency ratios gauging the ability of a company to generate sales using its assets. In other words, it shows how much in total dollars of sales is generated by $1 of assets invested. This ratio is also used as one of the key components in DuPont analysis.
The formula of total asset turnover ratio is expressed as follows:
|Total Asset Turnover Ratio =||Net Sales|
|Average Total Asset|
where average total assets is the sum of total assets at the beginning and at the end of the accounting period divided by 2. The information about net sales can be found in the statement of income, and total assets can be found in the balance sheet.
If the asset turnover ratio is used to measure the efficiency of using fixed assets to generate sales, the following formula is used:
|Fixed Asset Turnover Ratio =||Net Sales|
|Average Fixed Asset|
where average fixed assets is the sum of fixed assets at the beginning and at the end of the accounting period divided by 2.
The balance sheet of the XYZ Company is as follows:
Balance sheet, US$ in thousands
The reported statement of income for the current year is as follows:
The average amount of total assets in the current year is $54,420,000 ($52,970,000 - $55,870,000).
|Total Asset Turnover Ratio =||$45,680,000||= 0.839|
Let’s assume that in the previous year the total asset turnover ratio was 0.877. Its current value of 0.839 compared with a baseline of 0.877 indicates a reduction in efficiency of assets in generating sales. In other words, $1 invested in assets generated $0.877 in the previous year and $0.839 in the current year. Company management should improve performance in this area.
The asset turnover ratio shows the efficiency of using assets to generate sales, so a higher value is always favorable. A lower value indicates that a company has production problems or is faced with the problem of selling its products.
Please note that asset utilization efficiency may vary depending on the industry. Thus, this ratio works best to compare companies operating in the same industry and should also be compared with the industry average. Let’s consider the example mentioned above and assume the industry average at the end of the current year is 0.973.
The value of 0.973 compared with an industry baseline of 0.973 indicates that a company’s management has problems with asset utilization efficiency.
You can also calculate the asset turnover ratio using our online calculator.