Business, Legal & Accounting Glossary
Asset turnover is a financial ratio that measures the efficiency of a company’s use of its assets in generating sales revenue or sales income to the company.
Asset Turnover reveals the efficiency of corporate assets in generating revenue.
Asset turnover is the revenue generated for every dollar of assets owned by the company. The ratio is a measure of management efficiency.
As different industries have different structural requirements, a company’s asset turnover should be compared with those of companies in the same industry.
Asset turnover is an efficiency ratio used in financial analysis that shows the sales or revenue volume produced for ever dollar of assets owned. Asset turnover is sales divided by assets, and asset turnover is correctly expressed both as a percentage or as x times. For example, if Tractorco has $40 million of assets and $100 million of sales then its asset turnover is 250% or 2.5x. If Tractorco grows to $280 million of sales with the same assets, its asset turnover is 700% or 7.0x and its efficiency in the use of assets has increased by 180%. Asset turnover ratios vary considerably by industry, and high asset turnover may indicate a type of business with low margins. An important investment efficiency and fundamental analysis measure, asset turnover is one way to analyze if a growth company’s supporting asset base is keeping pace with its sales. Asset turnover is often applied in alongside inventory turnover and days-to-sales ratios to provide more strategy information about productive efficiency.
Asset turnover is meant to measure a company’s efficiency in using its assets. The higher the number, the better, although investors must be sure to compare a business to its industry. It is fallacy to compare completely unrelated businesses. The higher a company’s asset turnover, the lower its profit margin tends to be (and visa versa).
If there is a low turnover, it may be an indication that the business should either utilize its assets in a more efficient manner or sell them. Asset turnover ratios can also be calculated for specific assets such as the ratios of sales to cash and sales to inventory. Higher ratios reflect favourably on the firm’s ability to employ assets effectively.
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This glossary post was last updated: 4th August, 2021 | 42 Views.