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# The Asset Turnover Ratio

The asset turnover ratio is a part of the efficiency ratios that calculates if a company is able to bring in sales from its assets by putting net sales with average total assets into comparison. Simply put, this ratio reflects how effectively a company utilises its assets to bring in sales.

The total asset turnover ratio measures net sales as a percentage of assets to show the number of sales generated from each dollar of assets of the company. For example, a ratio of .6 shows that each dollar of assets generates 60 cents of sales.

The formula to calculate Asset Turnover Ratio is:

Asset Turnover Ratio = Net Sales/Average Total Assets

## Implication

The ratio calculates how effectively a firm utilises its assets to bring in sales, so a higher ratio is always more beneficial. Higher turnover ratios suggests that the company is making a good use of its assets. Lower the ratios, lower the efficiency of the usage of the assets and clear indication of either mismanagement or problems in production.

For example: a ratio of 1 suggests that the net sales of a company is equal to the average total assets for the year. Simply put, the company is brining in 1 dollar of sales for every dollar invested in assets.

To get a clear picture of how effeiciently a company is using its current assets, it should be compared to the companies within the same industry.

## Example

Wendyâ€™s tech company is a start up company that manufactures computers. Wendy is lately looking for new investors and has a meeting with one of the investors. The investor wants to get a clear picture of how effeciently Wendy uses her assets to produce sales, so he asks for her financial statements.

Here is what the financial statements reflected:

Beginning Assets: \$50,000

Ending Assets: \$100,000

Net Sales: \$25,000

Putting in the formula

Asset Turnover Ratio = Net Sales/Average Total Assets

ATR = \$25,000/(\$50,000 + \$1,00,000)/2

ATR = 0.33

The figure 0.33 suggests that for every dollar in assets, Wnedy only brings back in 33 cents. Simply put, Wendyâ€™s start up is not effective enough with the usage of assets.