How to Calculate Asset Turnover Ratio? Formula & Example

This ratio can be above or below 1, so for every $1 a company has in assets, they have x dollars in revenue. If the company has been in operation for at least two years, you will need to calculate the average of the total assets for the past two years. Let’s say that in its second year of operation, Linda’s Jewelry had $20,000 in assets. If you find that your asset turnover ratio competitors have higher turnover ratios than you, you’ll know that you need to either increase sales or decrease assets. You can increase the volume of sales through advertising and promotions. They can also be used internally by managers to evaluate their various divisions. This shows that company X is more efficient in its use of assets to produce revenue.

There are ways that companies can determine how efficiently they are operating. One of these ways is by measuring how well they are turning over assets. Asset Turnover ratio is the measurement of a company’s sales value in relation to its assets. Essentially, it is a measure of how efficient companies are at using assets to generate revenue. The higher this ratio, the more efficient the company is, and vice versa. If a company’s total asset turnover ratio is low, then this indicates that the company is not using assets efficiently to generate sales, and changes can be made.

Asset Turnover Ratio Defined

This is because the return on assets considers the net profit or income relative to the assets. The asset turnover ratio is a metric that compares revenues to assets. A high asset turnover ratio indicates a company that is exceptionally effective at extracting a high level of revenue from a relatively low number of assets. As with other business metrics, the asset turnover ratio is most effective when used to compare different companies in the same industry.

It is significantly necessary for any company to increase the sale of their products to keep moving forward and thereby generate revenues. If the company fails to generate revenues through its products and services, chances are that it will go bankrupt soon in the near future.

Interpreting Asset Turnover Ratio

Now that Company A has its asset turnover ratio and can see improvement, it’s time to compare it with others in the industry. They can pull up their competitors’ balance sheets and income statements, calculate their asset turnover ratios and compare them to their own. If they are still under, they need to make further changes to optimize inventory management or look to other means of improvement like changing operating hours. For example, maybe the other companies are open seven days a week, whereas this one closes on Sundays.