Asset Turnover Ratio: Its Formula, Example, Analysis, and More
Asset turnover ratio is used for measuring the company’s ability in generating sales from its assets. The ratio compares net sales and average total assists. It also shows if the company is efficient enough to use their assets to get more sales. The ratio is a percentage of assets, which shows sales per dollar that the company used on its assets.
What is the Formula and How to Calculate with Example?
Asset turnover ratio can be calculated with the given formula, which is easy to use and can make the work simple too. The formula is:
Asset turnover ratio = Net sales/ Average total assets
Well, net sales can be found in the company’s income statement that is used for calculating the asset turnover ratio as well as refunds should not be added from the total asset to get the right measure of the assets that the firm generates sales.
To get the average total assets, the beginning, total asset, and ending should be added and divided by two. To get the debt calculation, the weighted average calculation can be used. However, to get two years balance sheet, the simple method will be enough
If the company’s financial statements show, beginning asset as $50,000, ending asset as $100,000 and net sales which is $25,000. What will be the asset turnover ratio?
Well to calculated, the formula will be applied, which will be like this:
Asset turnover ratio = $25,000/ ($50,000 + $100,000) / 2
The asset turnover will be .33, which shows that the company will get the 33 cents on its every dollar asset. Well, this will be not very efficient when it comes to asset use.
What is the Analysis?
The asset turnover ratio is used in measuring the efficiency of the firm and how well they can generate their assets on its assets. In this case, the higher ratio will be considered in a favorable situation. It means that the company is using its assets in an efficient way. Well, in the situation if the ratio is low, then it means that the assets are not used well and the company needs to focus on that, especially the management or production teams.
Like most of the ratios, This one also based on the standards in the industry. There are some, industries who use assets better than any other. to understand the true use of the company; s asset, the numbers must be compared to other companies who belong to the same industry.
With the ratio, the investors and creditors get the idea of how the company is doing a job in managing their assets and its use to producing the products as well as sales. Sometimes the investors need to understand more specific assets of the company such as current assets and fixed assets. Well, for that fixed asset turnover ratio and working capital ratio can be used as they are simpler like this ratio and can be used for calculating the efficiency in asset classes.
Sudha is the senior publisher at Finance Glad. Sudha completed her education in BBA (Bachelor of Business Administration). She lives in Chennai. She is currently heading towards the banking topics. Sudha is an expert in analyzing and writing about most of the banks and credit card reviews. Sudha main hobbies and interests are reading, writing and watching the quality stuff over the internet. She usually wants to learn more productive stuff and share the best information to her readers over the internet via Finance Glad.