The success of your business relies on working capital. But working capital doesn’t just include cash flow, it also includes all the assets that are available to cover operational expenses or business costs. Total asset turnover ratio is a great way to measure your company’s ability to use assets to generate sales. Check out our asset turnover definition and learn how to calculate total asset turnover ratio, right here.
Asset turnover definition
Asset turnover ratio is a type of efficiency ratio that measures the value of your business’s sales revenue relative to the value of your company’s assets. It’s an excellent indicator of the efficiency with which a company can use assets to generate revenue. Typically, total asset turnover ratio is calculated on an annual basis, although if needed it can be calculated over a shorter or longer timeframe.
Asset turnover rate formula
Want to know how to calculate total asset turnover ratio? It’s relatively simple. Here’s the asset turnover rate formula that you can use in your calculations:
Total Asset Turnover = Net Sales / Total Assets
So, how does this all work in practice? Let’s look at an example. Imagine Company A has made $500,000 in net sales and has $2,000,000 in total assets. You can use the asset turnover rate formula to find out how efficiently they’re able to generate revenue from assets:
500,000 / 2,000,000 = 0.25 x 100 = 25%
This means that Company A’s assets generate 25% of net sales, relative to their value. In other words, every $1 in assets generates 25 cents in net sales revenue.
It’s important to remember that the asset turnover rate formula relies on you knowing your figures for total assets and net sales. Just to give you a quick refresher course, here are the formulas you can use to work out these two important pieces of information:
Net Sales = Gross Sales – Returns – Discounts – Allowances
Total Assets = Liabilities + Owner’s Equity
What is a good total asset turnover ratio?
The higher your company’s asset turnover ratio, the more efficient it is at generating revenue from assets. In short, it indicates that the company is productive and generates little waste, while it also demonstrates that your assets are still valuable and don’t need to be replaced. A lower asset turnover ratio indicates that a company is not especially effective at using its assets to generate revenue.
It’s important to note that asset turnover ratio can vary widely between different industries. For example, retail businesses tend to have small asset bases but much higher sales volumes, so they’re likely to have a much higher asset turnover ratio. By the same token, real estate firms or construction businesses have large asset bases, meaning that they end up with a much lower asset turnover.
So, what is a good total asset turnover ratio? As total asset turnover ratio varies so much between companies in different sectors, there’s no universally defined figure for a “good” asset turnover ratio, and it doesn’t make sense to compare figures for businesses in different sectors. In the retail sector, an asset turnover ratio of 2.5 or more could be considered good, while a company in the utilities sector is more likely to aim for an asset turnover ratio that’s between 0.25 and 0.5.
How to improve your asset turnover ratio
If you want to boost your total asset turnover ratio, you should look for ways to boost your net sales. There are plenty of strategies that you could pursue. Minimising returns can be a great way to improve your net sales – start by tackling returns fraud and offering store credit as an alternative to refunds. You could also introduce new products or service lines that don’t require any additional investment in assets, thereby opening new revenue streams to your business.
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