Asset Turnover Ratio: Definition, Formula & Example

Understand

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

Example

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.