How to Calculate Asset Turnover Ratio

Asset turnover ratio, also known as total asset turnover ratio, is an efficiency ratio that measures net sales revenue in relation to a company’s assets. Examples of assets include accounts receivable, cash, inventory, investments, equipment, and property. The asset turnover ratio is distinct from the return on assets (ROA), which is a profitability ratio that analyzes net income in relation to total assets. The asset turnover ratio formula is:

Asset Turnover = Total Sales Revenue / Average Total Assets

The asset turnover ratio is one of several indicators used to evaluate the efficiency of a company. This ratio is often calculated on an annual basis and measures the sales that a company generates from each dollar of assets. A higher asset turnover ratio indicates a more efficient company; a lower asset turnover ratio could indicate inefficiencies within the company from store management to billing. Investors and creditors use this ratio analysis to assess a company’s growth potential and liabilities.

To calculate this efficiency ratio and use the asset turnover ratio formula correctly, find the right inputs.

1. 1. Identify the necessary figures. Find the financial statements of a specific company for the year. Locate the dollar amount of the company’s assets at the start of the year (beginning assets) and the company’s assets at the end of the year (ending assets) on the balance sheet. Identify the company’s total sales for the year on its income statement.
2. 2. Calculate the average total assets. To find the average total assets, add the beginning assets to the ending assets. Take the sum and divide by two. The resulting quotient is your average total assets.
3. 3. Divide the total sales by average total assets. Place the average total assets in the denominator of the equation below your total sales. Divide the total sales by the average total assets. The resulting figure is the asset turnover ratio.

Asset turnover ratios are a useful tool for evaluating companies.

1. 1. Use asset turnover ratios to improve efficiency. Higher ratios are ideal for companies assessing their efficiency. Companies can use lower ratios to identify poor inventory management, incorrect use of assets, or substandard collection methods. By analyzing asset turnover ratios, companies can implement new strategies for improving efficiency.
2. 2. Use asset turnover ratios to compare companies. Only compare asset turnover ratios among companies within the same industry as different industries see different average turnover rates.
3. 3. Use asset turnover ratios within DuPont analysis. DuPont analysis is a system that analyzes a company’s return on equity (ROE), or their net income in relation to their total equity. This analysis uses profit margin, financial leverage, and asset turnover ratio to calculate ROE.

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