Accounting Textbooks Boundless Accounting Controlling and Reporting of Real Assets: Property, Plant, Equipment, and Natural Resources Reporting and Analyzing Assets
Accounting Textbooks Boundless Accounting Controlling and Reporting of Real Assets: Property, Plant, Equipment, and Natural Resources
Accounting Textbooks Boundless Accounting
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Accounting
Concept Version 9
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Asset Turnover Ratio

The asset turnover ratio is a measure of how well a business is using all of its assets to generate sales.

Learning Objective

  • State the formula to calculate the asset turnover ratio

Key Points

    • Asset\quad Turnover\quad =\frac { Net\quad Sales\quad Revenue }{ Average\quad Total\quad Assets }.
    • \quad \frac { Net\quad Sales }{ Average\quad Net\quad Fixed\quad Assets } = Fixed Asset Turnover Ratio.
    • All Asset Turnover Ratios must be judged in context. This is generally done by comparing the ratio's value to the business's ratios in prior accounting periods or to its competitors' asset turnover ratios.

Term

  • fixed asset

    Asset or property which cannot easily be converted into cash, such as land, buildings, and machinery.

Full Text

Balance Sheet

The balance sheet is where you will find information regarding the value of the business's assets, which is necessary to calculate the business's asset turnover ratio.

It can be difficult to review a company's balance sheet and get much meaning out of it with just a glance. While it may be impressive that a business has millions of dollars worth of equipment, it is hard to determine what that means from a business perspective.

One way of putting those values into context is to use them to generate ratios. One ratio that analysts use to evaluate a company's strength is the asset turnover ratio.

Asset Turnover Ratio

$Asset\quad Turnover\quad =\frac { Net\quad Sales\quad Revenue }{ Average\quad Total\quad Assets }$

The asset turnover ratio is a measure of how well a business is using all of its assets to generate sales. The ratio is calculated by dividing the total sales for the accounting period by the average value of the assets the business owned during the year. The average value is calculated by adding the value of assets the business owned at the beginning of the period to the value of the assets owned at the end of the period, and then dividing by two.

Fixed-Asset Turnover Ratio

$Fixed\quad Asset\quad Turnover\quad =\quad \frac { Net\quad Sales }{ Average\quad Net\quad Fixed\quad Assets }$

The fixed-asset turnover ratio is calculated in a similar manner, except instead of focusing all of the business's assets, the ratio is calculated using the business's fixed assets. This ratio measures how well a business is using its fixed assets to generate sales. To calculate the fixed asset turnover ratio, divide the total sales for the accounting period by the average fixed asset balance for the accounting period. The average fixed asset balance equals the beginning balance of fixed assets for the period plus the ending balance of fixed assets for the period, then dividing by two.

How to Use These Ratios

The higher the ratio, the better the business is performing in terms of sales. However, these ratios generally need context to better understand them. While a ratio may appear low by itself, it may actually be doing well overall. Generally, an analyst will compare a business's asset turnover ratio to the business's ratios from prior accounting periods or to the business's competitor's asset turnover ratio for the same period.

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