asset turnover

Fin

the ratio of a firm’s sales revenue to its total assets, used as a measure of the firm’s business efficiency.

EXAMPLE

Asset turnover’s basic formula is simply sales divided by assets:

Sales revenue/Total assets

Most experts recommend using average total assets in this formula. To determine this figure, total assets at the beginning of the year are added to total assets at the end of the year and divided by two. If, for instance, annual sales totaled $4.5 million, and total assets were $1.84 million at the beginning of the year and $1.78 million at the year end, the average total assets would be $1.81 million, and the asset turnover ratio would be:

4,500,000/1,810,000 = 2.49

A variation of the formula is:

Sales revenue/Fixed assets

If average fixed assets were $900,000, then asset turnover would be:

4,500,000/900,000 = 5

Asset turnover numbers are useful for comparing competitors within industries, and for growth companies to gauge whether or not they are growing revenue in healthy proportion to assets. Too high a ratio may suggest overtrading: too much sales revenue with too little investment. Conversely, too low a ratio may suggest undertrading and inefficient management of resources. A declining ratio may be indicative of a company that overinvested in plant, equipment, or other fixed assets, or is not using existing assets effectively.