Asset turnover ratio refers to how well a company uses assets to create sales. It measures efficiency by looking at net sales as a percentage of assets. If a company has a high asset turnover ratio, that means that it is very efficient at using assets to create revenue. If a company has a low asset turnover ratio, that means it is not efficient at creating revenue from assets.
Like many other metrics of financial health, the asset turnover ratio is industry specific. This means that when analyzing your company’s asset turnover ratio, it only makes sense to compare it to other companies in your industry.
Read on to learn about how to calculate asset turnover ratio and understand how it affects your business. Keep in mind that asset turnover ratio:
- Asset turnover ratio measures efficiency, so it’s usually better to have a high ratio
- In order to calculate asset turnover ratio, you need your net sales and average total assets
- You can adjust the asset turnover ratio formula to use only fixed assets
- A good range of asset turnover ratios differs depending on the industry
- Potential investors will compare the asset turnover ratios of different companies within the same industry to judge which is more efficient
What is asset turnover formula?
The asset turnover ratio formula is very simple. All you need to do is divide net sales by average total assets. This is also called the total asset turnover ratio.
Asset Turnover Ratio = Net Sales / Average Total Assets
Remember, net sales refers to revenue gained minus returns and discounts. Total assets is the average of assets at the end of the fiscal year.
For example, if Startup A had an annual revenue of one million dollars, but one hundred thousand dollars in returns, that means Startup A’s net sales amount to nine hundred thousand dollars.
At the beginning of the fiscal year, Startup A had two hundred thousand dollars in assets, and at the end it had one hundred and fifty thousand dollars in assets. So, add those two numbers together and divide them by two to find the average. That makes their average total assets amount to one hundred and seventy-five thousand dollars.
Now we can find Startup A’s asset turnover ratio by using the net sales and average total assets in formula.
$900,000 / $175,000 = 5.14
Startup A’s asset turnover ratio is 5.14. This means that for every dollar in assets, Startup A created $5.14 in sales.
Fixed Asset Turnover Ratio vs Total Asset Turnover Ratio
Depending on your company, you may want to make an adjustment to the asset turnover ratio. Instead of measuring total asset turnover ratio, you might want to calculate fixed asset turnover ratio.
As its name implies, fixed asset turnover ratio divides net sales by fixed assets instead of total average assets. You may want to use the fixed asset turnover ratio to look more at long term efficiency. Fixed assets are things like big pieces of machinery or other similar long term, real items you might need in your specific industry. So if your industry relies on long term investments, like machinery, the fixed asset turnover ratio can help you judge how well those investments are performing in the long term.
What is a Good Asset Turnover Ratio?
Once you’ve calculated your asset turnover ratio, whether by using the total asset turnover ratio formula or the fixed asset turnover ratio formula, you’ll be wondering whether or not your ratio is good.
But it’s important to be careful about how you use your asset turnover ratio to judge your company’s health. When comparing your asset turnover ratio to those of other companies, only look at other businesses in your industry. Different industries have different types of assets, so it doesn’t make sense to compare your company to a company that doesn’t work within the same parameters as yours.
To use the example of Startup A, if Startup A is a retail company, they wouldn’t want to compare their asset turnover ratio to that of a manufacturing company.
Key Takeaways
Once you’ve figured out your asset turnover ratio and compared it to similar industries, there are a few things to keep in mind:
- You can improve your asset turnover ratio by making changes like only ordering more inventory when you need it instead of stockpiling it. You could also make changes to increase sales, like upgrading your products.
- It’s a good idea to keep looking at your asset turnover ratio over a period in time. That way you can track changes in your company’s efficiency
- Like any other financial metric, it is possible to manipulate asset turnover ratio. For example, if a company decides to sell of assets, they can artificially increase their asset turnover ratio
LiveFlow’s templates make it easy to look at your asset turnover ratio over one fiscal year, or to track it over a long period of time. Automatically input your QuickBooks data into Google Sheets to find all the figures you need by using LiveFlow. You can easily refresh your data and you don’t need to change the formulas you use.
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