Asset Turnover: Formula and Calculator

The Asset Turnover Ratio is calculated by taking the net turnover amount and then dividing it by the total assets. A high value of asset turnover ratio formula the ratio means that the productivity of the assets in generating sales is also high and so is the profitability of the business.

As a financial and activity ratio, and as part of DuPont analysis, asset turnover is a part of company fundamental analysis. While the asset turnover ratio considers average total assets in the denominator, the fixed asset turnover ratio looks at only fixed assets. The fixed asset turnover ratio is, in general, used by analysts to measure operating performance. This efficiency ratio compares net sales to fixed assets and measures a company’s ability to generate net sales from property, plant, and equipment (PP&E). A higher fixed asset turnover ratio indicates that a company has more effectively utilized its investment in fixed assets to generate revenue. The asset turnover ratio measures the efficiency of a company’s assets in generating revenue or sales. It compares the dollar amount of sales to its total assets as an annualized percentage.

How to Calculate the Total Asset Turnover

An asset turnover ratio of 2.67 means that for every dollar’s worth of assets you have, you are generating $2.67 in sales. Asset Turnover Ratio is used in multiple ways, one of which is its usage is DuPont Analysis. The DuPont Analysis calculates the Return on Equity of a firm and uses profit margin, asset turnover ratio, and financial leverage to calculate https://www.bookstime.com/ RoE. As shown in the formula below, the ratio compares a company’s net sales to the value of its fixed assets. 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. Company A reported beginning total assets of $199,500 and ending total assets of $199,203.

So from the calculation, it is seen that the asset turnover ratio of Nestle is less than 1. We have discussed how you would be able to calculate the asset turnover ratio and would also be able to compare among multiple ratios in the same industry. We use the average total assets across the measured net sales period in order to align the timing between both metrics. Also, many other factors can affect a company’s asset turnover ratio during periods shorter than a year. The asset turnover ratio can be modified to analyze only the fixed assets of a company. Companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover. Companies in the retail industry tend to have a very high turnover ratio due mainly to cutthroat and competitive pricing.

Comparisons of Ratios

The asset turnover ratio can be used to compare different companies, or to compare a company’s performance over different time periods. The ratio can also be used to identify potential areas where a company could improve its efficiency. The asset turnover ratios for these two retail companies provide for a straight-across comparison of their performance.

To determine the value of a company’s assets, the average value of the assets for the year needs to first be calculated. Asset turnover ratio measures the value of a company’s sales or revenues generated relative to the value of its assets. The asset turnover ratio is used to evaluate how efficiently a company is using its assets to drive sales.