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← Investopedia Video: Asset Turnover Ratio

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Showing Revision 18 created 02/18/2019 by Alexandre Clemente.

  1. The asset turnover ratio
    is a measure of a company's ability

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