A higher ratio is generally favored as there is the implication that the company is more efficient in generating sales or revenues. A lower ratio illustrates that a company may using the information shown here, which of the following is the asset turnover ratio? not be using its assets as efficiently. Asset turnover ratios vary throughout different sectors, so only the ratios of companies that are in the same sector should be compared.
- Same with receivables – collections may take too long, and credit accounts may pile up.
- Industries with low profit margins tend to generate a higher ratio and capital-intensive industries tend to report a lower ratio.
- Conversely, if a company has a low asset turnover ratio, it indicates it is not efficiently using its assets to generate sales.
- The total asset turnover ratio is a general efficiency ratio that measures how efficiently a company uses all of its assets.
- The turnover metric falls short, however, in being distorted by significant one-time capital expenditures (Capex) and asset sales.
- The asset turnover ratio can also be analyzed by tracking the ratio for a single company over time.
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. The asset turnover ratio calculation can be modified to omit these uncommon revenue occurrences. A high asset turnover ratio signals that a business is using its assets efficiently to generate sales.
Asset Turnover Ratio Example
This is slightly higher than the industry average of 2.1, which indicates that the business is using its assets efficiently. Investors and lenders can also look at your asset turnover ratio to help figure out how well your business is run. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. Below are the steps as well as the formula for calculating the asset turnover ratio.
For example, retail companies have high sales and low assets, hence will have a high total asset turnover. On the other hand, Telecommunications, Media & Technology (TMT) may have a low total asset turnover due to their high asset base. Thus, it is important to compare the total asset turnover against a company’s peers. Check out our debt to asset ratio calculator and fixed asset turnover ratio calculator to understand more on this topic. For instance, a ratio of 1 means that the net sales of a company equals the average total assets for the year. In other words, the company is generating 1 dollar of sales for every dollar invested in assets.
Accounting 101 for Small Businesses
Let’s say ABC Company operates in the retail sector, which has an average asset turnover ratio of 2.1. The total asset turnover ratio calculates net sales as a percentage of assets to show how many sales are generated from each dollar of company assets. For instance, a ratio of .5 means that each dollar of assets generates 50 cents of sales. The ratio measures the efficiency of how well a company uses assets to produce sales.
