Introduction to Asset Turnover Ratio
While running a business certain financial ratios and measures are important to analyse your company’s performance. These ratios help you to understand if your company is heading towards profit or loss. One such ratio is the Asset turnover ratio. This ratio is often used as an indicator to know if the company is efficiently using its assets.
What is the asset turnover ratio?
The asset turnover ratio is a ratio between the value of a company’s revenue or sales made by the company and the value of the company’s assets. This ratio is often used to determine the efficiency with which the company is using its assets to earn revenue. This ratio is important for the companies as it helps to evaluate the company’s performance. Asset turnover ratio is usually calculated annually for a particular financial year.
The company’s performance can be determined by how high or low the asset turnover ratio is. When the asset turnover ratio is high, it indicates a higher efficiency at which a company is using its assets for revenues while a low asset turnover ratio indicates a lower efficiency at which the company is using its assets.
The asset turnover ratio is different for different companies and is affected both by the sales made by the company and the purchases of assets made by the company. This ratio is often used by investors to compare companies in the same sector before deciding whether to invest in those companies.
How is the asset turnover ratio calculated?
To calculate the asset turnover ratio of a company, you need to follow few steps and use the following formula:
Asset turnover = Total sales / beginning assets + ending assets / 2
Where, Total sales are the total of annual sales, Beginning assets are the assets that the company has at the start of the year, Ending assets are the assets that the company has at the end of the year.
The steps you need to follow to calculate the company’s asset turnover ratio are as follows: - The first step is to locate the value of the company's assets at the start of the year. - Then you have to locate the value of the company’s assets at the end of the year. - Then you need to add the beginning asset value and the ending asset value and divide the sum by 2. This will give you an average asset value for that particular year. - After calculating the average asset value, you need to locate total sales or revenue for that year. - Then you have to divide the total sales value by the average asset value for that particular year. This is the last step in calculating the asset turnover ratio.
