However, looking at the ratios of two telecommunication companies would be a productive comparison. So, comparing the asset turnover ratio between a retail company and a telecommunication company would not be meaningful. Some sectors, such as retail and consumer staples, tend to have smaller asset bases with high sales volume, resulting in higher ratios because they need to replace their inventories at a high rate each year.Ĭonversely, telecommunications and utility companies have large asset bases that turn over more slowly compared to their sales volume. Ratios can vary widely from sector to sector. There is no particular figure that constitutes a good or bad ratio. It's important to note that comparisons of asset turnover ratios are only meaningful for evaluating companies in the same sector or industry. For example, companies that outsource a large portion of their production can have a much higher turnover but fewer profits than their competitors.Ī thorough analysis considers the asset turnover ratio in conjunction with other measures, such as return on assets, for a clearer picture of a company's performance. For that reason, investors should look at the ratio's trend over time.Īlso, a high turnover ratio does not necessarily translate to profits, which is a more accurate way to measure a company's performance. Or it can be impacted by one-time events, such as when a company deliberately increases its inventory to fulfill a large, one-off customer order or sells off a significant portion of its inventory in a short period of time. However, experienced investors avoid relying on a single, one-year reading of the ratio as it can fluctuate. These companies have greater potential to grow and compound their earnings over time. Generally, capital-intensive companies with a high asset turnover ratio have the capacity to operate with fewer assets than their less efficient competitors that might rely heavily on their equity and debt to operate. Understanding Asset Turnover RatioĪmong the more important considerations for investors when evaluating a company is how efficiently it utilizes its assets to produce revenue. The total assets figure becomes the denominator for the asset turnover ratio. After adding the beginning value to the ending value, divide the sum by two to reveal the average asset value, or total assets, for the year.Look for the value of the company's assets at the end of the year.Look to its balance sheet for the value of its assets at the beginning of the year.To determine the average value of the company's assets for the year: The figure should be net of discounts, allowances, and returns. To determine the value of net sales for the year, look to the company's income statement for total sales. The formula's components (net sales and total assets) can be found in a company's financial statements. Its total assets: the total of its equity and liabilities at the beginning of the year plus the total at the end of the year divided by two.Īsset Turnover Ratio = Net Sales / Total Assets How To Calculate Asset Turnover Ratio.A company's net sales: its gross sales after accounting for returns, discounts, and allowances.The formula for calculating asset turnover ratio consists of two factors: Asset Turnover Ratio Formula & Calculation Key Takeaway: Companies with higher asset turnover ratios tend to perform better because they use less equity and debt to produce revenue. Companies with a lower asset turnover ratio may be relying too heavily on equity and debt to generate revenue, which can hurt their performance and long-term growth potential. For investors, that can translate into a greater return on shareholder equity. They tend to perform better because they use less equity and debt to produce revenue, resulting in more revenue generated per dollar of assets. This ratio can be a useful point of comparison for investors to evaluate the operations of different companies and their potential as an investment.Ĭompanies that don't rely heavily on their assets to generate revenue have a higher asset turnover ratio than companies that do. Generally, companies with a high asset turnover ratio are more efficient at generating revenue through their assets, while those with a low ratio are not. The asset turnover ratio is a financial measure of how efficiently a company utilizes its assets to produce sales revenues. Working capital consists of a company's cash flow as well as its assets. The asset turnover ratio measures the efficiency with which a company uses its assets to generate sales by comparing the value of its sales revenue relative to the average value of its assets.Ĭompanies rely on their working capital to generate sales revenue. The success of any company is largely based on its ability to effectively use its assets to generate sales. SunnySideUp/iStock via Getty Images What Is the Asset Turnover Ratio?
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