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Asset Turnover Ratio

 

Asset turnover ratio compares company’s sales and assets in order to identify the efficiency of assets used in the business. In simple words, it shows show much of sales are generated by company’s assets relatively. The higher this ratio is the better. 

 

The meaning of this ratio mostly depends on the sector of the industry. The normal tendency is that sectors with lower profit margin and lower asset base should have higher asset turnover. This ratio can be used to measure how much of sales could be generated by asset investments in to some industry niche, and then the profitability analysis should be performed. It is also possible to compare different companies in the same industry group; and if business model and profitability margins are the similar, then different asset turnover might indicate very serious and costly inefficiency of the company. But asset turnover ratio should be applied only for businesses that are based on large asset investments. If business is built on ‘know-how’, this ratio will be useless. 

 

However, if profit margins of compared companies are different, then it is natural that some companies are focusing more on profit than on sales. Because of this, another ratios as ‘return on assets’, ‘return on invested capital’ or ‘return on capital employed’ should be also calculated and compared.

 

Asset turnover ratio formula

Asset turnover ratio = Sales / Assets

 

Asset turnover ratio is also known as ‘total asset turnover ratio’. Another popular modification of this ratio is ‘fixed-asset turnover ratio’. 

 

 






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