Investopedia Video: Asset Turnover Ratio

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.