Normally, a higher asset turnover ratio indicates the efficiency of a business regarding the use of assets for improved sales and a lower amount invested in assets generates more sales.Ī higher turnover ratio reflects that the company is producing more revenue per rupee of assets.Ī lower asset turnover ratio implies inefficiency in the use of the assets for generating sales. Hence, capital-intensive industry sectors have a lower asset turnover ratio. While machine manufacturing and telecom sectors tend to have large asset bases. Some sectors have a higher asset turnover ratio compared to others.įor example, retail and consumer staples businesses have relatively lower asset bases but they have high sales capacities - hence, these businesses have a higher asset turnover ratio. The higher asset turnover ratio is better for the company. The asset turnover is the efficiency ratio that illustrates how effectively the company uses its plants and equipment. How do you interpret the Asset Turnover Ratio? The asset turnover ratio of 1.92 times means that ABC company is able to generate a sale of Rs 1.92 while using fixed assets worth Rs 1. Here is some information about the ABC company. Even investors can take only the ending balance. The total assets figure can be found on the balance sheet of a company. Average Total Assets:Īverage total assets are the average of aggregate assets at the end of the current year and aggregate assets at the end of the preceding year. Net sales are reported on the income statement of a company. Net sales, also known as revenue that denote the company’s revenue after deducting sales returns, sales discounts and sales allowances. The asset turnover ratio formula is calculated by the net sales divided by average total assets.Īsset Turnover Ratio = (Net Sales / Average Total Assets) In another word, the asset turnover ratio indicates to the investors how well a business is using its equipment to produce revenue.Ī company has a high asset turnover ratio, which suggests a company more efficiently used its assets to generate revenue. The proportion of net sales generated per rupee invested in assets. The asset turnover ratio is called the total asset turnover ratio that measures how efficiently a company utilizes its assets to generate sales. The ratio is an essential metric and it plays a crucial role in the DuPont analysis, where we break the return on equity (ROE) into three parts, one of them is the asset turnover ratio. The asset turnover ratio is an efficiency ratio that gives an idea to the investors of how easily a company's management operates the business. The asset turnover ratio evaluates the value of total sales to its total assets of a company.
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