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. Sometimes, investors and analysts are more interested in measuring how quickly a company turns its fixed assets or current assets into sales. In these cases, the analyst can use specific ratios, such as the fixed-asset turnover ratio or the working capital ratio to calculate the efficiency of these asset classes. The working capital ratio measures how well a company uses its financing from working capital to generate sales or revenue.

Therefore, internal maintenance management must focus on cost control, efficient work scheduling, and confirming adherence to regulations. 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.

A higher ratio is generally favored as there is the implication that the company is more efficient in generating sales or revenues. A lower ratio illustrates that a company may not be using its assets as efficiently. Asset turnover ratios vary throughout different sectors, so only the ratios of companies that are in the same sector should be compared. The ratio is typically calculated on an annual basis, though any time period can be selected. The critical difference between the two ratios lies in the assets considered in the calculations. The fixed version focuses solely on the efficiency of generating sales using fixed assets.

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  1. A company may be generating record levels of sales and efficiently using their fixed assets; however, the company may also have record levels of variable, administrative, or other expenses.
  2. On the other hand, a low total asset turnover suggests that the company is unable to generate satisfactory results with the asset it has in hand.
  3. Lower ratios mean that the company isn’t using its assets efficiently and most likely have management or production problems.
  4. The asset turnover ratio formula is equal to net sales divided by the total or average assets of a company.
  5. Therefore, the asset turnover ratio is an essential component of DuPont analysis, which provides a comprehensive understanding of a company’s financial performance.
  6. The fixed asset turnover ratio (FAT) is, in general, used by analysts to measure operating performance.

The best approach for a company to improve its total asset turnover is to improve its efficiency in generating revenue. Check out our debt to asset ratio calculator and fixed asset turnover ratio calculator to understand more on this topic. If you’re using accounting software, you can find these numbers on your income statement and balance sheet. In the realm of financial analysis, the Asset Turnover Ratio plays a critical role.

How Useful is the Fixed Asset Turnover Ratio to Investors?

Since this ratio can vary widely from one industry to the next, comparing the asset turnover ratios of a retail company and a telecommunications company would not be very productive. Comparisons are only meaningful when they are made for different companies within the same sector. The asset turnover ratio tends to be higher for companies in certain sectors than in others. Retail and consumer staples, for example, have relatively small asset bases but have high sales volume—thus, they have the highest average asset turnover ratio. Conversely, firms in sectors such as utilities and real estate have large asset bases and low asset turnover.

Average total assets are found by taking the average of the beginning and ending assets of the period being analyzed. The standard asset turnover ratio considers all asset classes including current assets, long-term intuit extension assets, and other assets. A higher ratio indicates efficient utilization of fixed and current assets to generate sales. It signifies that the company maximizes its overall asset base to generate revenue.

Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. Investors who are looking for investment opportunities in an industry with capital-intensive businesses may find FAT useful in evaluating and measuring the return on money invested. If you’re using a manual ledger system, you’ll calculate your net sales from your sales journal. Be sure your net sales total is the figure left after sales adjustments and returns have been accounted for, otherwise the ratio will be incorrect. Even with accounting software, you’ll likely calculate the ratio separately, since very few small business accounting programs can create accounting ratios.

Asset Turnover Template

Asset utilization ratios such as the asset turnover ratio can provide a lot of information about your business. If your results are on the low side, there are ways you can increase it, such as adding a new product line or service to your business, which can help drive sales up. Once you have these numbers, you can use the formula to calculate the asset turnover ratio for your business. It signifies that the company generates more than a dollar of revenue for every dollar invested in assets.

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 higher the asset turnover ratio, the better the company is performing, since higher ratios imply that the company is generating more revenue per dollar of assets. The higher the asset turnover ratio, the more efficient a company is at generating revenue from its assets. Conversely, if a company has a low asset turnover ratio, it indicates it is not efficiently using its assets to generate sales.

Companies can artificially inflate their asset turnover ratio by selling off assets. This improves the company’s asset turnover ratio in the short term as revenue (the numerator) increases as the company’s assets (the denominator) decrease. The asset turnover ratio calculation can be modified to omit these uncommon revenue occurrences.

Interpreting the Asset Turnover Ratio

A company with a high asset turnover ratio operates more efficiently as compared to competitors with a lower ratio. The asset turnover ratio measures how effectively a company uses its assets to generate revenue or sales. The ratio compares the dollar amount of sales or revenues to the company’s total assets to measure the efficiency of the company’s operations. In financial analysis, different variations of this ratio provide insights into specific aspects of a company’s operations. The most common variants are the fixed asset turnover and total asset turnover ratios.

It’s important to note that these ratios can vary significantly across industries and companies. Therefore, comparing the ratio with industry benchmarks and historical data for ABC Corporation can provide more meaningful insights into the company’s performance and trends. Fisher Company has annual gross sales of $10M in the year 2015, with sales returns and allowances of $10,000.

How to Calculate ATR?

In contrast, the total asset version encompasses all assets employed by the company, including both fixed and current assets. This result indicates that, on average, the company generates $2 in sales revenue for every $1 invested in assets during the year. A high ratio suggests efficient asset utilization, indicating that ABC Corporation effectively generates revenue relative to its asset base. The asset turnover ratio uses total assets instead of focusing only on fixed assets as done in the FAT ratio.

The Asset Turnover Ratio is a performance measure used to understand the efficiency of a company in using its assets to generate revenue. It measures how effectively a company is managing its assets to produce sales and is a key indicator of operational efficiency. A higher ratio suggests that the company is using its assets more effectively to generate revenue. The Asset Turnover Ratio is calculated by dividing the company’s revenue by its average total assets during a certain period. Therefore, the ratio fails to tell analysts whether or not a company is even profitable. A company may be generating record levels of sales and efficiently using their fixed assets; however, the company may also have record levels of variable, administrative, or other expenses.

The asset turnover ratio is calculated by dividing net sales by average total assets. It is only appropriate to compare the asset turnover ratio of companies operating in the same industry. We can see that Company B operates more efficiently than Company A. This may indicate that Company A is experiencing poor sales or that its fixed assets are not being utilized to their full capacity.

For instance, a service business should only compare their ratio to similar service businesses, while hospitality and retail businesses should only compare results to other hospitality or retail companies. By performing this calculation, you can see that your average asset total for 2019 was $47,875. What may be considered a “good” ratio in one industry may be viewed as poor in another.