0:00:05.833,0:00:09.709 The asset turnover ratio[br]is a measure of a company's ability 0:00:09.709,0:00:12.699 to use its assets [br]to generate sales or revenue, 0:00:12.699,0:00:15.179 and is a calculation[br]of the amount of sales 0:00:15.179,0:00:17.949 or revenue generated[br]per dollar of assets. 0:00:17.949,0:00:20.948 The formula [br]for the ratio is as follows: 0:00:20.948,0:00:24.630 Sales or Revenues[br]รท Total Assets 0:00:24.630,0:00:27.578 A higher number is preferable,[br]since it suggests that 0:00:27.578,0:00:31.122 the company is using its assets[br]efficiently to make money. 0:00:31.122,0:00:34.052 A lower number may convince [br]a company to try other methods 0:00:34.052,0:00:37.301 to help maximize[br]the efficiency of its assets. 0:00:37.301,0:00:40.690 Nevertheless, this ratio [br]varies between industries, 0:00:40.690,0:00:42.878 and can only be[br]compared effectively 0:00:42.878,0:00:45.320 between businesses[br]in the same sector. 0:00:45.320,0:00:48.780 Asset turnover is usually[br]calculated annually, 0:00:48.780,0:00:51.290 either for the fiscal,[br]or calendar year. 0:00:51.290,0:00:55.026 The total assets may also be[br]the calculated average of assets 0:00:55.026,0:00:57.847 at the beginning,[br]and end of the year. 0:00:57.847,0:01:02.484 For example, X-Eyes Mart has [br]an asset base of \$400,000,000 0:01:02.484,0:01:04.354 at the beginning [br]of its fiscal year. 0:01:04.354,0:01:08.217 The company sees its asset base[br]increase to \$500,000,000 0:01:08.217,0:01:09.887 by its fiscal[br]year end, 0:01:09.887,0:01:15.686 which means that it had an average of[br]\$450,000,000 in assets for the fiscal year. 0:01:15.686,0:01:17.534 During that same[br]fiscal year, 0:01:17.534,0:01:20.844 the company generated[br]\$250,000,000 in revenues. 0:01:20.844,0:01:24.885 Thus, the asset turnover ratio[br]is \$250,000,000 0:01:24.885,0:01:29.845 divided by \$450,000,000 [br]equals 0.56. 0:01:29.845,0:01:34.936 Since X-Eyes Mart is a big-box retailer[br]that sells clothing and household goods, 0:01:34.936,0:01:40.166 its asset turnover of 0.56 is below[br]the retail industry standard. 0:01:40.166,0:01:42.788 Asset turnover ratios [br]should be higher 0:01:42.788,0:01:45.488 for companies [br]in consumer staples sectors, 0:01:45.488,0:01:48.984 since these businesses[br]tend to have small asset bases, 0:01:48.984,0:01:52.404 but a high volume of sales [br]due to competitive pricing. 0:01:52.404,0:01:53.815 For comparison's [br]sake, 0:01:53.815,0:01:59.645 the retail giant Wal-Mart [br]had an asset turnover of 2.37 in 2012. 0:01:59.645,0:02:02.206 As a result, [br]X-Eyes Mart CEO, 0:02:02.206,0:02:05.203 Rip Smiley decides[br]to restructure the company 0:02:05.203,0:02:08.548 in order to [br]improve efficiency.