Asset Turnover Ratio is an efficiency ratio, uses to measure how much a company is earning by utilizing its total assets. In other words, it states that how much the company earns in dollars against $1 of its utilized assets.
The ratio is described with number of variants like
Asset Turnover Ratio = Net Sales / Average Total Assets
Fixed Asset Turnover Ratio = Net Sales / Average Fixed Assets
A company X specializes in manufacturing auto parts in your country, following data is abstracted from its recent year published financial statements:
Sale = $10,000
Cost of Goods Sold = $5,900
Total Current Assets = $5,400
Total Fixed Assets = $15,000
Being an investor, how would you gauge the performance of the company?
For this, you may calculate net profit but we are taking sales to calculate the ratio:
Asset Turnover Ratio = 10,000 / 20,400 = 0.49*100 = 49%
A company with higher asset turnover ratio is considered efficient in operations because it deploys fewer assets to get more sales or earnings. A low ratio depicts that the assets of the company are not being used optimally.