The asset turnover ratio is a measure of a company's ability
to use its assets to generate sales or revenue,
and is a calculation of the amount of sales
or revenue generated per dollar of assets.
The formula for the ratio is as follows:
Sales or Revenues ÷ Total Assets
A higher number is preferable, since it suggests that
the company is using its assets efficiently to make money.
A lower number may convince a company to try other methods
to help maximize the efficiency of its assets.
Nevertheless, this ratio varies between industries,
and can only be compared effectively
between businesses in the same sector.
Asset turnover is usually calculated annually,
either for the fiscal, or calendar year.
The total assets may also be the calculated average of assets
at the beginning, and end of the year.
For example, X-Eyes Mart has an asset base of $400,000,000
at the beginning of its fiscal year.
The company sees its asset base increase to $500,000,000
by its fiscal year end,
which means that it had an average of $450,000,000 in assets for the fiscal year.
During that same fiscal year,
the company generated $250,000,000 in revenues.
Thus, the asset turnover ratio is $250,000,000
divided by $450,000,000 equals 0.56.
Since X-Eyes Mart is a big-box retailer that sells clothing and household goods,
its asset turnover of 0.56 is below the retail industry standard.
Asset turnover ratios should be higher
for companies in consumer staples sectors,
since these businesses tend to have small asset bases,
but a high volume of sales due to competitive pricing.
For comparison's sake,
the retail giant Wal-Mart had an asset turnover of 2.37 in 2012.
As a result, X-Eyes Mart CEO,
Rip Smiley decides to restructure the company
in order to improve efficiency.