Asset To Turnover Ratio

Asset To Turnover Ratio

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The Asset To Turnover Ratio is a financial ratio used to measure the efficiency of a company’s operation. This ratio tells us the relationship between sales or revenue relative to the value of the average assets. This ratio is used to determine the company’s ability to generate sales from the company’s assets. The ratio can be calculated by dividing net sales or revenue by average total assets.

Asset To Turnover Ratio

Asset To Turnover Ratio Definition –

The Asset Turnover Ratio can be defined as the ratio of net sales to average total assets. Net sales mean whatever money a company earns from selling its product. Average total assets can be determined by averaging assets at the start of the year and assets at the end of the year. This ratio varies from sector to sector, so always use this ratio between the companies within the same sector. A higher ratio indicates that the company is using its assets efficiently and a lower ratio indicates that the company is not managing its assets efficiently.

Asset To Turnover Ratio Formula –

The formula can be calculated by dividing Net Sales or Revenue by the Average Total Asset.

Asset To Turnover Ratio = Net Sales / Average Total Assets

Average Total Assets = ( Assets at the Beginning of the Year + Assets at the Ending of the Year ) / 2

We can get the net sales or revenue from the income statement and average total assets from the company’s balance sheet. To calculate the ratio, we can directly use net sales from the income statement but to calculate average total assets we need to use the above formula of average total assets for that we need assets at the beginning and assets at the ending of the year.

Asset To Turnover Ratio Example –

PARTICULARSCOMPANY ACOMPANY B
Net sales200100
Assets at the beginning of the year11030
Assets at the ending of the year12034
Average total assets11532
Asset to turnover ratio1.743.13

In above table, we have taken examples of company A and company B to understand this concept.

Let’s take example of company A,

Net Sales of company A = 200

Average Total Assets = (Assets at the beginning of company A) + (Assets at the ending of company A)/2

Average Total Assets = ( 110 + 120 ) / 2

Average Total Assets = 115

Asset Turnover Ratio of company A = ( Net sales of company A ) / (Average total assets of company A )

Asset Turnover Ratio of company A = 200 / 115

Asset To Turnover Ratio Of Company A = 1.74

Let’s take example of company B,

Net Sales of company B = 100

Average Total Assets = (Assets at the beginning of company B) + (Assets at the ending of company B)/2

Average Total Assets = ( 30 + 34 ) / 2

Average Total Assets = 32

Asset Turnover Ratio of company B= ( Net sales of company B ) / (Average total assets of company B )

Asset Turnover Ratio of company B = 100 / 32

Asset To Turnover Ratio Of Company B = 3.13

Asset To Turnover Ratio

Asset To Turnover Ratio Meaning –

As we know, this ratio tells us how efficiently a company is using its assets to generate revenue for a company. In the above example, we can see the asset to turnover ratio of company B is 3.13 and company A is 1.74 which shows company B is using its assets more efficiently than company B. If you see it carefully, the net sales of company A are twice that of company B but due to the lower average total assets of company B, the asset to turnover ratio of company B is higher than company A. So company B is looking good for investment than company A.

Always remember we have to use this ratio for companies within the same sector. This ratio tends to be higher for real estate companies and lower for consumer and retail companies. Higher the average total assets lower the asset to turnover ratio.

Asset To Turnover Ratio Conclusion –

  1. The ratio can be determined by dividing net sales or revenue by average total assets.
  2. This ratio helps us to understand how efficiently a company uses its assets to generate revenue.
  3. Higher the ratio is better for investment.
  4. Use this ratio for analyzing companies within the same sector.
  5. Lower the average total assets higher, the asset to turnover ratio.
  6. Asset to turnover ratio varies from industry to industry.
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