What is Asset Turnover Ratio?
Asset turnover ratio is an asset management ratio to determine how efficiently a business uses its assets (any assets) to generate sales. The asset turnover ratio indicates how many dollars of sales that the business generates for every dollar the company invested in their assets.
To put it simply, the asset turnover ratio is a tool to analyze how efficiently a company use their all assets to make money.
The asset turnover ratio is a comparison between net sales and average total assets. The more asset turnover ratio, the more money the company generated by the assets they invested.
In contrast, a low asset turnover ratio reflects the problems with surplus production capacity and bad inventory management.
However, an extremely high asset turnover ratio suggests that the business also has an asset management problem or tight account receivable policies.
- Asset turnover ratio is a measure how efficiency the business generate sales from its asset, the ratio indicates the sales dollars generated per dollar of assets.
- A higher value of the asset turnover ratio suggests the business is effective in using its resources to generate sales.
- The asset turnover ratio anwser “How effective is the company at generating sales from their invested assets?
Asset Turnover Ratio Formula
The asset turnover ratio is calculated by dividing net sales by average total assets, as the following asset turnover ratio formula:
Asset Turnover = Net Sales ÷ Average Total Assets
Average total assets can be calculated by divinded the sum of beginning and ending values of total assets by 2.
For example, the Feriors company’s balance sheet shows the net sales of $15 million and total assets for $3 million.
Asset Turnover ratio = $15 ÷ $3
The Feriors’s asset turnover ratio is 5 times which means the company can sold 5 times more than their assets. In other words, the Feriors generated 5 dollars for every dollar the company invested in their assets.
Frequency Asked Question
Asset turnover ratio is a measure how efficiency the business generates sales from their invested asset. The asset turnover ratio indicates the sales dollars generated per dollar of assets.
The calculation of asset turnover ratio can be calculated as the following formula: Asset Turnover = Net Sales ÷ Average Total Assets
A good asset turnover ratio is a higher value. The high value of the asset turnover ratio suggests the business is effective in using its resources to generate sales.
The asset turnover ratio is also known as the total asset turnover ratio, but not the same as the fixed asset turnover ratio. The difference between the asset turnover ratio and fixed asset turnover ratio is a comparison of “total asset” or “fixed asset”.