Asset turnover (total asset turnover) is a financial ratio that measures the efficiency of a company’s use of its assets to product sales. It is a measure of how efficiently management is using the assets at its disposal to promote sales. Remember to compare this figure with the industry average to see how efficient the organization really is in using its total assets.

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She has worked in multiple cities covering breaking news, politics, education, and more. Asset turnover can be calculated quarterly, annually, or over any desired period. The ratio can also change significantly from year to year, so just because it’s low one year doesn’t mean it will remain low over time.

Fixed Asset Turnover Ratio Formula

All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. 11 Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Additionally, you can track how your investments into ordering new assets have performed year-over-year to see if the decisions paid off or require adjustments going forward. Thus, a sustainable balance must be struck between being efficient while also spending enough to be at the forefront of any new industry shifts.

Example Calculation of Asset Turnover

This improves the company’s asset turnover ratio in the short term as revenue (the numerator) increases as the company’s assets (the denominator) decrease. However, the company then has fewer resources to generate sales in the future. The asset turnover ratio calculation can be modified to omit these uncommon revenue occurrences. You can compare your company’s current asset turnover ratio with others in the same industry to see how you stack up.

Like with most ratios, the asset turnover ratio is based on industry standards. To get a true sense of how well a company’s assets are being used, it must be compared to other companies in its industry. The asset turnover ratio is calculated by dividing net sales by average total assets. It would not make sense to compare the asset turnover ratios for Walmart and AT&T, since they operate in different industries.

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This is a rare scenario and typically indicates serious operational issues or accounting errors. Asset Turnover Ratio is an essential tool for assessing business efficiency. By measuring how effectively a company is utilizing its assets to generate revenue, this ratio provides insight into a company’s operational efficiency.

• Although a company’s total revenue may be increasing, the asset turnover ratio can identify whether that company is becoming more or less efficient at using its assets effectively to generate profits.
• The company’s average total assets for the year was $4 billion (($3 billion + $5 billion) / 2 ).
• When comparing the asset turnover ratio between companies, ensure the net sales calculations are being pulled from the same period.
• For Year 1, we’ll divide Year 1 sales ($300m) by the average between the Year 0 and Year 1 PP&E balances ($85m and $90m), which comes out to a ratio of 3.4x.

All of our content is based on objective analysis, and the opinions are our own. Companies should strive to maximize the benefits received from their assets on hand, which tends to coincide with the objective of minimizing any operating waste. Diane Costagliola is a researcher, librarian, instructor, and writer who has published articles on personal finance, home buying, and foreclosure.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology.