Asset Turnover Ratio Definition

Same with receivables – collections may take too long, and credit accounts may pile up. Fixed assets such as property, plant, and equipment (PP&E) could be unproductive instead of being used to their full capacity. The asset turnover ratio tends to be higher for companies in certain sectors than in others.

This means that Company A’s assets generate 25% of net sales, relative to their value. In other words, every $1 in assets generates 25 cents in net sales revenue. This means that for every dollar in assets, Sally only generates 33 cents.

How to interpret the asset turnover ratio

In the retail sector, an asset turnover ratio of 2.5 or more is generally considered good. However, a utility company or a manufacturing company might have a different ideal ratio. It is best to compare the company’s FAT ratio with its peers in the same industry to get a better idea of how efficient it is. For example, the current assets turnover ratio does not show the turnover in terms of debt. So, it cannot measure the efficiency of the company to service long-term debt. However, if the fixed asset turnover ratio is too high , the business may be close to the maximum capacity.

What is a good asset turnover ratio?

In the retail sector, an asset turnover ratio of 2.5 or more could be considered good, while a company in the utilities sector is more likely to aim for an asset turnover ratio that's between 0.25 and 0.5.

Asset turnover ratio is an efficiency ratio that is used to measure the efficiency of a company in generating revenue through the use of its assets. High turnover means that the company uses a small percentage of its assets each year to generate huge amounts of sales. However, it could be difficult to achieve high asset turnover if there are few assets to work with . An efficient company can deliver on its desired level of sales with a reasonable investment in assets. RestructuringRestructuring is defined as actions an organization takes when facing difficulties due to wrong management decisions or changes in demographic conditions.

Net Asset Turnover Ratio

A lower ratio indicates that a company is not using its assets efficiently and may have internal problems. While the asset turnover ratio should be used to compare stocks that are similar, the metric does not provide all of the detail that would be helpful for stock analysis. It is possible that a company’s asset turnover ratio in any single year differs substantially from previous or subsequent years. Investors should review the trend in the asset turnover ratio over time to determine whether asset usage is improving or deteriorating. Both beginning and ending balances refer to the value of fixed assets minus its accumulated depreciation, in other words, the net fixed assets.

Asset Turnover Ratio Definition

Another company, Company B, has a gross revenue of $15 billion at the end of its fiscal year. Its beginning assets are $4 billion, and its ending assets are $2 billion. The average total assets will be calculated at $3 billion, thus making the asset turnover ratio 5. It is important to note that the asset turnover ratio will be higher in Asset Turnover Ratio Definition some sectors than in others. For example, retail organizations generally have smaller asset bases but high sale volumes, creating high asset turnover ratios. On the other hand, businesses in sectors such as utilities and real estate often have large asset bases but low sale volumes, often generating much lower asset turnover ratios.

Comparisons of Ratios

The beginning balance is the value of net fixed assets at the beginning of the balance period, whereas the ending balance is the value at the end of the period. This means that, in reality, the value of average fixed assets is equal to the value of the average net fixed assets. When we divide net sales by current assets and multiply it by 100, the value of sales that occurred due to an investment of Rs. 100 is obtained. Therefore, the current assets turnover ratio, when expressed in percentage terms, indicates the net sales that have occurred due to the investment of each Rs. 100 in the process. Once this same process is done for each year, we can move on to the fixed asset turnover, where only PP&E is included rather than all the company’s assets.

Asset Turnover Ratio Definition

The asset turnover ratio calculation can be modified to omit these uncommon revenue occurrences. Though ABC has generated more revenue for the year, XYZ is more efficient in using its assets to generate income as its asset turnover ratio is higher. XYZ has generated almost the same amount of income with over half the resources as ABC. The asset turnover ratio is a metric that compares revenues to assets.

Total asset turnover ratio

She has been in the accounting, audit, and tax profession for more than 13 years, working with individuals and a variety of companies in the health care, banking, and accounting industries. The DuPont analysis is a framework for analyzing fundamental performance popularized by the DuPont Corporation. 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.

Is an asset turnover ratio of 1 good?

A ratio of less than 1 indicates that the company's total assets are not generating enough revenue at the end of the year, which may be unfavorable for the company. A ratio greater than one is generally considered favorable, indicating that the company generates sufficient revenue from its assets.