To calculate average total assets, add up the beginning and ending balances of all assets on your balance sheet. Be sure not to count anything twice in this calculation, like cash in the bank accounts, which would be included in both beginning and ending balances. Asset turnover is a crucial financial metric used to assess a company’s efficiency in generating revenue from its assets. In simpler terms, it shows how many dollars of revenue a company generates for each dollar invested in its assets. The asset turnover ratio uses the value of a company’s assets in the denominator of the formula.

Fixed vs. Total Assets

Typically, a higher fixed asset turnover ratio indicates that a company has more effectively utilized its investment in fixed assets to generate revenue. Remember to compare this figure with the industry average to see how efficient the organization really is in using its total assets. The fixed asset turnover ratio formula divides a company’s net sales by the value of its average fixed assets.

And this revenue figure would equate to the sales figure in your Income Statement. The higher the number the better would be the asset efficiency of the organization. It’s being seen that in the retail industry, this ratio is usually higher, i.e., more than 2. On the other hand, a low asset turnover ratio could indicate inefficiency in using assets, suggesting problems with the company’s inventory management, sales generation, or asset acquisition strategies. It could also mean that the company is asset-heavy and may not be generating adequate revenue relative to the assets it owns. The ratio measures the efficiency of how well a company uses assets to produce sales.

Thus, to calculate the asset turnover ratio, divide net sales or revenue by the average total assets. One variation on this metric considers only a company’s fixed assets (the FAT ratio) instead of total assets. 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.

Asset Turnover Ratio: Definition, Formula, and Analysis

He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. First, as we have been given Gross Sales, we need to calculate the Net Sales for both companies. Someone on our team will connect you with a financial professional in our network holding the correct designation and expertise. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others.

Example Calculation of Asset Turnover

1. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career.
2. Rather, in that case, we need to find out the average asset turnover ratio of the respective industries, and then we can compare the ratio of each company.
3. Access all first party information such as slide decks, transcripts, and earnings reports from public companies worldwide in one convenient platform.
4. While investors may use the asset turnover ratio to compare similar stocks, the metric does not provide all of the details that would be helpful for stock analysis.
5. Although a company’s total revenue may be increasing, the asset turnover ratio can identify whether that company is becoming more or less efficient at using its assets effectively to generate profits.

Comparing the relative asset turnover ratios for AT&T with Verizon may provide a better estimate of which company is using assets more efficiently in that sector. We will include everything that yields a value for the owner for more than one year. At the same time, we will also include assets that can easily convert into cash. And we will also include intangible assets that have value, but they are non-physical, like goodwill.

Considering how costly the initial purchase of PP&E and maintenance can be, each spending decision towards these long-term investments should be made carefully to lower the chance of creating operating inefficiencies. Diane Costagliola is a researcher, librarian, instructor, and writer who has published articles on personal finance, home buying, and foreclosure.

Assets Turnover Ratio FAQs

Companies with low profit margins tend to have high asset turnover ratios, while those with high profit margins usually have lower ratios. The asset turnover ratio for each company is calculated as net sales divided by average total assets. It would not make sense to compare the asset turnover ratios for Walmart and AT&T, since they operate in different industries.

So, if you have a look at the figure above, you will visually understand how efficient Wal-Mart asset utilization is. For information pertaining to the registration status of 11 Financial, please contact the state securities regulators for those states in which 11 Financial maintains a registration filing. An efficient company can deliver on its desired level of sales with a reasonable investment in assets. All of these categories should be closely managed to improve the asset turnover ratio.

For instance, if the total turnover of a company is 1.0x, that would mean the company’s net sales are equivalent to the average total assets in the period. In other words, this company is generating $1.00 of sales for each dollar invested into all assets. Negative asset turnover indicates that a company’s sales are less than its average total assets. This is a rare scenario and typically indicates the asset turnover ratio calculated measures serious operational issues or accounting errors. For instance, a ratio of 1 means that the net sales of a company equals the average total assets for the year.

Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career. What may be considered a “good” ratio in one industry may be viewed as poor in another. This is because asset intensity can greatly differ among different industries. Ratio comparisons across markedly different industries do not provide a good insight into how well a company is doing.

Sally’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. 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.

Of course, it helps us understand the asset utility in the organization, but this ratio has two shortcomings that we should mention. It’s seen that the ratio of Company A is more than the ratio of Company B. As it is assumed that they both belong to the same industry, we can conclude that Company A can utilize its assets better to generate revenue than Company B. By contrast, to achieve the same volume of business, a less efficient company will make a greater investment in assets (thereby incurring larger financial costs and, hence, recording a lower return on investment). For instance, it could also indicate that a company is not investing enough in its assets, which might impact its future growth. Hence, it’s important to benchmark the ratio against industry averages and competitors.

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 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. 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.