1 00:00:05,833 --> 00:00:09,709 The asset turnover ratio is a measure of a company's ability 2 00:00:09,709 --> 00:00:12,699 to use its assets to generate sales or revenue, 3 00:00:12,699 --> 00:00:15,179 and is a calculation of the amount of sales 4 00:00:15,179 --> 00:00:17,949 or revenue generated per dollar of assets. 5 00:00:17,949 --> 00:00:20,948 The formula for the ratio is as follows: 6 00:00:20,948 --> 00:00:24,630 Sales or Revenues รท Total Assets 7 00:00:24,630 --> 00:00:27,578 A higher number is preferable, since it suggests that 8 00:00:27,578 --> 00:00:31,122 the company is using its assets efficiently to make money. 9 00:00:31,122 --> 00:00:34,052 A lower number may convince a company to try other methods 10 00:00:34,052 --> 00:00:37,301 to help maximize the efficiency of its assets. 11 00:00:37,301 --> 00:00:40,690 Nevertheless, this ratio varies between industries, 12 00:00:40,690 --> 00:00:42,878 and can only be compared effectively 13 00:00:42,878 --> 00:00:45,320 between businesses in the same sector. 14 00:00:45,320 --> 00:00:48,780 Asset turnover is usually calculated annually, 15 00:00:48,780 --> 00:00:51,290 either for the fiscal, or calendar year. 16 00:00:51,290 --> 00:00:55,026 The total assets may also be the calculated average of assets 17 00:00:55,026 --> 00:00:57,847 at the beginning, and end of the year. 18 00:00:57,847 --> 00:01:02,484 For example, X-Eyes Mart has an asset base of \$400,000,000 19 00:01:02,484 --> 00:01:04,354 at the beginning of its fiscal year. 20 00:01:04,354 --> 00:01:08,217 The company sees its asset base increase to \$500,000,000 21 00:01:08,217 --> 00:01:09,887 by its fiscal year end, 22 00:01:09,887 --> 00:01:15,686 which means that it had an average of \$450,000,000 in assets for the fiscal year. 23 00:01:15,686 --> 00:01:17,534 During that same fiscal year, 24 00:01:17,534 --> 00:01:20,844 the company generated \$250,000,000 in revenues. 25 00:01:20,844 --> 00:01:24,885 Thus, the asset turnover ratio is \$250,000,000 26 00:01:24,885 --> 00:01:29,845 divided by \$450,000,000 equals 0.56. 27 00:01:29,845 --> 00:01:34,936 Since X-Eyes Mart is a big-box retailer that sells clothing and household goods, 28 00:01:34,936 --> 00:01:40,166 its asset turnover of 0.56 is below the retail industry standard. 29 00:01:40,166 --> 00:01:42,788 Asset turnover ratios should be higher 30 00:01:42,788 --> 00:01:45,488 for companies in consumer staples sectors, 31 00:01:45,488 --> 00:01:48,984 since these businesses tend to have small asset bases, 32 00:01:48,984 --> 00:01:52,404 but a high volume of sales due to competitive pricing. 33 00:01:52,404 --> 00:01:53,815 For comparison's sake, 34 00:01:53,815 --> 00:01:59,645 the retail giant Wal-Mart had an asset turnover of 2.37 in 2012. 35 00:01:59,645 --> 00:02:02,206 As a result, X-Eyes Mart CEO, 36 00:02:02,206 --> 00:02:05,203 Rip Smiley decides to restructure the company 37 00:02:05,203 --> 00:02:08,548 in order to improve efficiency.