Definition of Asset Turnover Ratio
- The asset turnover ratio is used to measure the efficiency of a company.
- The higher the ratio, the more efficient the company is.
- The asset turnover ratio looks at how efficiently a company uses its assets to produce sales.
What is the Formula for Asset Turnover Ratio?
- The asset turnover ratio can be calculated by dividing the revenue by the average total assets.
Revenue ÷ Average Total Assets
- The average total assets can be calculated by adding the beginning and ending total assets and dividing them by 2.
Asset Turnover Ratio in Practice
- Alex sells TV’s and creates a revenue of $500,000. His total assets at the beginning of the period are worth $300,000 and are worth $290,000 at the end of the period. What is the asset turnover ratio?
- 500,000 ÷ [(300,000 + 290,000) ÷ 2] = $1.70
- Therefore, for every dollar Alex’s company has in assets, the company generated $1.70 in sales.