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. In other words, this ratio shows how efficiently a company can use its assets to generate sales. Show
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. The asset turnover ratio is calculated by dividing net sales by average total assets.  Net sales, found on the income statement, are used to calculate this ratio returns and refunds must be backed out of total sales to measure the truly measure the firm’s assets’ ability to generate sales. Average total assets are usually calculated by adding the beginning and ending total asset balances together and dividing by two. This is just a simple average based on a two-year balance sheet. A more in-depth, weighted average calculation can be used, but it is not necessary. AnalysisThis ratio measures how efficiently a firm uses its assets to generate sales, so a higher ratio is always more favorable. Higher turnover ratios mean the company is using its assets more efficiently. Lower ratios mean that the company isn’t using its assets efficiently and most likely have management or production problems. For instance, a ratio of 1 means that the net sales of a company equals the average total assets for the year. In other words, the company is generating 1 dollar of sales for every dollar invested in assets. Like with most ratios, the asset turnover ratio is based on industry standards. Some industries use assets more efficiently than others. To get a true sense of how well a company’s assets are being used, it must be compared to other companies in its industry. 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. Sometimes investors also want to see how companies use more specific assets like fixed assets and current assets. The fixed asset turnover ratio and the working capital ratio are turnover ratios similar to the asset turnover ratio that are often used to calculate the efficiency of these asset classes. ExampleSally’s Tech Company is a tech start up company that manufactures a new tablet computer. Sally is currently looking for new investors and has a meeting with an angel investor. The investor wants to know how well Sally uses her assets to produce sales, so he asks for her financial statements. Here is what the financial statements reported:
The total asset turnover ratio is calculated like this: As you can see, Sally’s ratio is only .33. This means that for every dollar in assets, Sally only generates 33 cents. In other words, Sally’s start up in not very efficient with its use of assets. According to BDC Business Consultant Jorge Henao, each ratio provides you with a different perspective, but depending on what type of business you operate one ratio could be more helpful than the other. For instance, if you operate in a capital intensive environment, the fixed asset turnover will help you determine how much your fixed assets (e.g. machinery and equipment) are contributing to your business productivity. On the other hand, if you operate in a service environment the total asset turnover might be more helpful as the investment in fixed asset won’t necessarily be as important as the inventory and/or the receivables. Asset turnover ratioThe asset turnover ratio indicates how much your business is generating in revenues for every dollar invested in total assets. Thus, if your business has revenues of $100,000 and total assets of $50,000, the asset utilization ratio will be 2:1. That means your operations generate $2 in revenues for every $1 you have in assets. FormulaAsset turnover ratio = Total sales / Total assets Fixed asset turnover ratioThe fixed asset turnover ratio indicates how much your business is generating in revenues for every dollar invested in fixed assets. Thus, if your business has revenues of $100,000 and net fixed assets of $25,000, the asset utilization ratio will be 4:1. That means your operations generate $4 in revenues for every $1 you have in net fixed assets. FormulaFixed asset turnover ratio = Total sales / Net book value of fixed assets Henao offers the following tips for entrepreneurs who want to use asset turnover ratios in their business. 1. Know your benchmarks.A good asset turnover depends on the type of environment you operate in and the size of the business. So you need to find out what the asset turnover is for a business of your size in a similar industry. 2. Understand why your ratios are above/below the industry benchmark.If your fixed asset turnover is well above the industry benchmark it doesn’t necessarily mean that your capital productivity is higher, this could be explained by old depreciated assets that break down very often or that require a lot of manual intervention. Similarly, if your fixed asset turnover if well below the industry benchmark it could be explained by an important investment you’ve made recently in new machines that are to provide you with higher revenues in the near future. 3. Look at other indicators.The asset turnover ratios are helpful in terms of capital productivity. But measuring labour productivity is equally important. “You can have the best, fastest, most high-volume piece of equipment installed on your shop floor, but if you’re only using it at 25% capacity because you don’t have enough revenues or you have inefficiencies that require that your employees do a lot of manual work you’re still not getting full value out of it.” Henao says Get help when you need itFinancial ratios like asset turnover can give you powerful insights into how your business is performing. They can also be a little complex or intimidating at first, especially if you don’t know what to look for or how to interpret them. Henao says it’s always a good idea to get some expert help if you feel you need it. With the right information, you can make smart decisions to fine-tune your operations and improve your profitability. What does fixed asset turnover measure?The fixed asset turnover ratio reveals how efficient a company is at generating sales from its existing fixed assets. A higher ratio implies that management is using its fixed assets more effectively.
What does turnover measure in financial accounting?Turnover is an accounting concept that calculates how quickly a business conducts its operations. Most often, turnover is used to understand how quickly a company collects cash from accounts receivable or how fast the company sells its inventory.
What is sales turnover?Sales turnover – What is sales turnover? Sales turnover is the company's total amount of products or services sold over a given period of time - typically an accounting year.
What is fixed asset turnover also known as?The fixed asset turnover ratio is similar to the tangible asset ratio, which does not include the net cost of intangible assets in the denominator. The ratio is also sometimes known as the fixed asset ratio.
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The turnover is a measure of sales per dollar of the firms money invested in fixed assets.
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