What is Asset Turnover Ratio? The formula to calculate the total asset turnover ratio and how to evaluate this ratio? To learn about the Asset Turnover Ratio in more detail, refer to the following article by Viindoo.
What is Asset Turnover Ratio?
Asset Turnover Ratio means total asset turnover ratio. It measure the value of a company's sales which is relative to the total value of its assets. This ratio is considered an indicator of how efficiently a company's assets and capital are used to generate revenue.
Asset turnover ratio
The higher total asset turnover ratio is, the more effective company's assets are in production activities with more profits. And vice versa, if the company has a low total asset turnover, it shows that the company's capital and asset management is not effective.
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The formula for calculating the asset turnover ratio
To calculate asset turnover ratio, you must first understand the calculation formula as well as the parameters related to the formula. For easier understanding, readers can refer to the below Asset Turnover Ratio calculation formula.
How to calculate Asset Turnover Ratio
- Calculation Formula:
Asset Turnover = Total/[(Beginning assets + Ending Assets)/2]
Where:
Total sales: Total sales of the year is the revenue earned by the business after deducting related items (such as taxes, sales allowances, promotions, etc.)
Beginning assets : Total assets at the beginning of the period.
Ending assets: Total assets at the end of the period.
Example: Enterprise A, operating in the manufacturing sector, reports total assets at the beginning of the period of $500,700 and total assets at the end of the period of $500,300. During the same period, Company A generated sales of $787,000 with a sales discount of $17,000.
At this time, the total sales of business A is 787,000 - 17,000 = 770000, Beginning assets is 500,700 and Ending assets is 500,300
So, the ratio of total assets turnover of company A will be calculated = (787,000 - 17,000) / [(500,700 + 500,300) / 2] = 1.54. So, with $1 invested in total assets, business A generates $1.54 in revenue.
How to evaluate Total Asset Turnover ratio accurately
So, how do businesses evaluate the asset turnover ratio effectively and accurately? It is known that the asset turnover ratio will be calculated every year, this ratio is high or low depending on how the company generates revenue that year. Therefore, calculating the asset turnover ratio for a business is extremely important and necessary.
Assessing Total Asset Turnover ratio is very important
On the other hand, using the traditional method of manual calculation to calculate the asset turnover ratio will easily lead to small data errors. This will result in incorrect total asset turnover ratio.
That's why, Viindoo encourages businesses to use 4.0 technology and application to store data about assets and revenue to calculate Total Asset Turnover ratio simply, accurately and effectively. A software that businesses can refer to to manage asset turnover ratio is Viindoo Accounting - Comprehensive Accounting Management Software.
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The significance of the total asset turnover ratio for enterprises
The Total Asset Turnover ratio has an important meaning for each enterprise. Specifically, this ratio helps businesses to easily and accurately assess the company's performance over the years.
Every year, businesses will calculate the total asset turnover ratio based on the statistical data of that year. The higher the value of Total Asset Turnover ratio calculated, the more effective the business strategy and asset use of the enterprise will be. On the contrary, if the value of the total asset turnover ratio is too low, it shows that the enterprise is having problems in optimizing the asset use value.
The meaning of Total Asset Turnover ratio for enterprises
Another note that comparing this ratio between enterprises in different fields does not make any practical sense. Because, the Total Asset Turnover ratio value will change according to different trends.
For example, companies dealing in consumer goods will have a high total asset turnover ratio. Because these businesses have a small asset value, but the sales are very large. In contrast, businesses in the field of real estate will have a lower Total Asset Turnover ratio because of their large asset base but low revenue.
Therefore, we do not have a specific figure for a Total Asset Turnover ratio that is good across sectors. In the retail sector, an asset turnover ratio of 2.5 or more can be considered very positive. On the other hand, for businesses in the utility sector (electricity, natural gas, water, etc.), the ratio will be between 0.25 and 0.5.
Through the above article, Viindoo hopes that readers have understood what is Asset Turnover Ratio as well as how to calculate asset turnover in a business. These are useful information that surely anyone in businesses should know.
