Asset turnover ratio

Definition

The asset turnover ratio is a financial metric used to evaluate a company’s efficiency in generating revenue from its assets. It measures how effectively a company utilises its assets to generate sales or revenue. 

What is the asset turnover ratio?

This ratio is calculated using the following formula:

Asset turnover ratio = net sales or revenue / average total assets

It indicates how much revenue is generated for every dollar invested in assets.

The adequacy of the asset turnover ratio can vary significantly by industry. Different industries have different asset turnover norms, so it’s important to compare a company’s ratio to that of its peers.

A high ratio may suggest that the company is effectively using its assets to generate sales, which is generally viewed positively. However, an extremely high ratio might indicate underutilised assets. Conversely, a low ratio could indicate inefficient use of assets, which may be a concern for investors and creditors.

Investors look at this ratio to gauge the company’s operational efficiency and effectiveness in utilising its resources. It can impact stock prices and influence investment decisions.

While the asset turnover ratio is valuable, it’s important to consider industry-specific factors and other financial metrics for a comprehensive evaluation of a company’s operational efficiency.

Example of asset turnover ratio

1. Financial information:
   • ABC Retail has the following financial information for the year:
     • Net sales: £1,500,000
     • Beginning total assets: £800,000
     • Ending total assets: £1,200,000
2. Calculation of asset turnover ratio:
   • The asset turnover ratio is calculated as: ​
     Average total assets = (£800,000 = £1,200,000) / 2
     Asset turnover ratio = £1,500,000 / £1,200,000 = 1,5 

   The asset turnover ratio for ABC Retail is 1.5, indicating that, on average, the company generates £1.50 in sales for every £1 of assets.