Welcome to professrsavings.com, we teach finance basics.
Today we will teach you what asset turnover ratio is in two minutes.
The asset turnover ratio is a measure of a company’s ability to use its assets to generate sales or revenue.
This is calculated in the amount of sales or revenue generated per dollar of assets.
Let’s keep it simple. The formula for the ratio is simply sales or revenues divided by total assets.
Think about it this way.
Higher number is better since it suggest that the company is using its assets efficiently to make money.
However, a lower number may indicate a company to try other strategies to help maximize the efficiency of its assets.
Note. This ratio varies between industries and can only be compared effectively between businesses in the same sector such as a the auto industry with an auto industry.
In terms of timeline, asset turnover is most likely calculated annually either for the fiscal or calendar year.
Let’s do a simple example.
Petfood Inc. had 10 million asset beginning of its fiscal year. The company sees its asset base increased to $30 million by its fiscal year end, which means that it had an average of $15 million in assets for the fiscal year.
During that same fiscal year, the company generated $12 million in revenue. Thus the asset turnover ratio is $12 million divided by $15million equals 0.8.
Petfood Inc. sells pets and pet apparel, its asset turnover of 0.8 is below the pet retail standard.
Another thing to take note.
Asset turnover ratios should be higher for companies in consumer sectors since these businesses tend to have small asset basis due high volume of sales due to competitive pricing.