The Asset Turnover Ratio is the efficiency ratio of the ability of the company to generate the sails fro assets by comparing the net sales with total assets. In simple words, it means that how the company generates sales from its assets efficiently.
From the total asset turnover ratio, we know that from each dollar of the company asset how much sales generated. For example, .2 mean we get from each dollar off asset 20 cents.
Asset Turnover Ratio Formula
When we divide the average net sales by the total average assets then we get the Asset Turnover ratio. The value of net sales we can be found by the income statement of the company. Which is minus fro the total sales from which truly measurement of the generated sales found by the company.
Whereas Average total asset can be found by adding the beginning and ending total balance assets and dividing this with 2 which is simple average for 2 years on balance sheet.
From this ratio, measurement is taken the progress of the company use its assets to generate the sales. If the ratio result is high then it is more favourable. if the ratio result is slow then not favourable. The high turnover ratio shows that the firm uses its assets for sales more efficiently. But if the Turnover ratio is not good when we say that the management of that firm is not good and that firm cannot use its assets for sales efficiently.
For example, if the ratio turnover is 1 then we say that sales of the company equal to the total assets of the company. Which means that for 1 dollar sale company invest one dollar in an asset.
It is up to the standard of the company that if the turnover ratio efficiently uses by the company they have a good standard. If it has not good turnover then have not a good standard.
Here we provide an example that how we get the turnover ratio of the company and check the standard of the company.
Let the company has
Beginning assets= $1oo,ooo
Net sales 50,000
From the above values, we can find the Asset turnover ratio from the formula.
Asset Turnover Ratio
From the above result, it is clear that the turnover result is not good. Because for every dollar in assets firm generated sales 33 cents. So the firm startup is not so good.
You can learn more about: