Asset Turnover Ratio: Definition, Formula, and Analysis

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. To calculate the ratio, divide net sales or revenues by average total assets. The asset turnover ratio helps investors understand how effectively companies are using their assets to generate sales.

How Is Asset Turnover Ratio Used?

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For Year 1, we’ll divide Year 1 sales ($300m) by the average between the Year 0 and Year 1 PP&E balances ($85m and $90m), which comes out to a ratio of 3.4x. One critical consideration when evaluating the ratio is how capital-intensive the industry that the company operates in is (i.e., asset-heavy or asset-lite). 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. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation.

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The asset turnover ratio considers the average total assets in the denominator, while the fixed asset turnover ratio looks at only fixed assets. The fixed asset turnover ratio (FAT ratio) is used by analysts to measure operating performance. The asset turnover ratio measures how effectively a company uses its assets to generate revenues or sales.

The numerator in the equation shows the income generated and the denominator shows the total assets used to generate the revenue. Like with most ratios, the asset turnover ratio is based on industry standards. 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. 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. The asset turnover ratio for each company is calculated as net sales divided by average total assets.

Asset Turnover vs. Fixed Asset Turnover

1. For example, retail companies have high sales and low assets, hence will have a high total asset turnover.
2. A company’s asset turnover ratio in any single year may differ substantially from previous or subsequent years.
3. Remember to compare this figure with the industry average to see how efficient the organization really is in using its total assets.
4. Additionally, you can track how your investments into ordering new assets have performed year-over-year to see if the decisions paid off or require adjustments going forward.
5. Unlike other turnover ratios, like the inventory turnover ratio, the asset turnover ratio does not calculate how many times assets are sold.
6. Access all first party information such as slide decks, transcripts, and earnings reports from public companies worldwide in one convenient platform.

The standard asset turnover ratio considers all asset classes including current assets, long-term assets, and other assets. 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. Negative asset turnover indicates that a company’s sales are less than its average total assets. This is a rare scenario and typically indicates serious operational issues or accounting errors. The fixed asset turnover ratio is intended to isolate the efficiency at which a company uses its fixed asset base to generate sales (i.e. capital expenditure).

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Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. 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.

Depreciation is the allocation of the cost of a fixed asset, which is expensed each year throughout the asset’s useful life. Typically, 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 uses the value of a company’s assets in the denominator of the formula. The average value of the assets for the year is determined relationship between bond prices and interest rates using the value of the company’s assets on the balance sheet as of the start of the year and at the end of the year.

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. An asset turnover ratio equal to one means the net sales of a company for a specific period are equal to the average assets for that period. The company generates $1 of sales for every dollar the firm carries in assets.