Asset Turnover RatioDefined with Formula & More

Written By:
Lisa Borga

What is the Asset Turnover Ratio?

The asset turnover ratio compares the revenue or sales of a company to its asset base.

This ratio can be used by investors or analysts to evaluate whether or not businesses are effectively making use of their assets to produce revenue.

If a business has a higher asset turnover ratio, it shows that the business is efficient at using its assets to generate revenue.

In contrast, businesses that have lower asset turnover ratios are not proficient at using their assets to produce revenue.

Asset Turnover Ratio

The formula for the asset turnover ratio is:

Total Asset Turnover = Net Sales / Average Total Assets

The following steps are used to calculate the asset turnover ratio.

1. Determine the average value of the company’s assets. Find the balance of the company’s assets at the beginning of the year on the company’s balance sheet. Then find the balance of the company’s assets as of the fiscal year’s end. Add these two values together and then divide them by two to get the average value of the company’s assets.
2. Find the company’s total sales or revenue. This will be listed on the business’s income statement.
3. Compute the Asset Turnover Ratio. Divide the net sales by the average total assets.

Using the Asset Turnover Ratio

Generally, a company will compute this ratio yearly.

If the ratio is high, it means the business is likely performing well because the high ratio shows that the business is doing a good job of using its assets to generate revenue or sales.

Although, it is important to consider that this ratio is typically higher in some sectors as compared to others.

For example, retail companies tend to have a high volume of sales and a reasonably small asset base, which gives them a high asset turnover ratio.

In contrast, utility firms have a large asset base, thus giving them a lower asset turnover ratio.

Due to the fact that this ratio does vary a lot from one sector to another, it is best not to compare the ratios of companies in different industries.

Such a comparison would not help an investor in evaluating a company.

This ratio only provides relevant information when used to compare businesses in the same industry.

Asset Turnover Ratio Example

We will now compute the asset turnover ratio for several different companies, two are part of the retail sector, and two are in the utility sector.

The first company we look at will be Albertsons.

Albertsons is a large grocery store chain and is part of the retail sector.

Retail businesses tend to have small asset bases and higher asset turnover ratios.

Albertsons has an asset turnover ratio of 2.46.

This means that Albertsons has sales of $2.46 for every dollar it has in assets.

This is a typical asset turnover ratio for a grocery store.

Krogers has an asset turnover ratio of 2.8, which is within the average range for a grocery store.

But, since Krogers has a higher asset turnover ratio than Albertsons, Krogers is doing a better job of generating revenue from its assets.

We will also look at two utility companies.

Utility companies have large asset bases and therefore tend to have low asset turnover ratios.

Dominion Energy has an asset turnover ratio of .03, which is not unusual for utility companies as they often have asset turnover ratios of less than one.

Duke Energy is another utility company and has an asset turnover ratio of .66, which is also typical for a utility company.

Although by comparing the asset turnover ratio of Dominion Energy to Duke Energy, which is in the same sector, it does appear that Duke Energy is using company assets more efficiently.

It would not be useful to compare Dominion Energy or Duke Energy to either Albertsons or Krogers since they are in different sectors.

The DuPont Analysis

The asset turnover ratio makes up an important part of the DuPont analysis.

This analysis was originally used in the 1920s as a way to analyze DuPont’s extensive business interests.

The initial step in this method breaks down a company’s return on investment into three parts: asset turnover, profit margin, and financial leverage.

This step is detailed below.

ROE = Profit Margin(RevenueNet Income​)​​ × Asset Turnover(AARevenue​)​​ × Financial Leverage(AEAA​)​​

AA = Average assets

AE = Average equity​

There are times when investors may be more concerned with the speed at which a business converts its assets into revenue.

When an investor wants this information, there are two particularly useful ratios, the working capital ratio or the fixed-asset turnover ratio (FAT).

These ratios compute the efficiency of these classes of assets.

For example, the working capital ratio analyzes a business’s use of the financing it receives from its working capital to produce revenue or sales.

Asset Turnover Ratio vs Fixed Asset Turnover Ratio

The asset turnover ratio looks at how effectively a business generates revenue from its assets. The formula used to calculate this ratio uses average total assets in the denominator.

In comparison, the FAT is typically used to measure a business’s operating performance.

It is an efficiency ratio that looks at net sales as compared to fixed assets and then measures what part of its sales come from its fixed asset investments, such as its plant, equipment, or property.

The fixed asset balance used in this calculation is net of its accumulated depreciation.

Depreciation allocates the cost of a fixed asset over its useful life.

Generally, if a business has a high FAT, it shows that its fixed assets have been used effectively to produce revenue.

Limitations of the Asset Turnover Ratio

This ratio is useful for investors that want to compare similar stocks.

However, investors will likely want more information when analyzing stocks.

A business’s asset turnover ratio can vary considerably over the years.

So, it’s important for investors to look for a trend in the ratio to see if a business is using its assets more efficiently.

It’s also a good idea to consider that the asset turnover ratio can be somewhat misleading at times, such as being low due to a large asset purchase that a business makes in preparation for a high growth period.

In contrast, it could look artificially high due to a company selling some of their assets because they expect declining growth.

There are a number of factors that can affect this ratio, such as seasonality when the ratio is being considered for a time period of less than one year.

What Does the Asset Turnover Ratio Measure?

The ratio looks at a business’s ability to generate sales from its assets.

It compares the revenues of a company to the total assets of the company.

So, to compute this ratio, the net sales are divided by the company’s average total assets.

There is a similar ratio called the fixed asset turnover ratio that only takes into account the fixed assets of a business.

Low vs High Asset Turnover Ratio

Typically, companies want this ratio to be high.

This generally means businesses are doing a good job of producing revenue or sales from their asset base.

Whereas businesses that have a low asset turnover ratio may not be using their assets effectively and may even have some internal issues.

What is Considered a Good Asset Turnover Ratio?

These ratios differ according to industry.

Therefore, it’s important for businesses to only compare this ratio within their industry.

An example of this would be utility companies that generally have a lower asset turnover ratio due to their large asset base.

In contrast, retail companies tend to have small asset bases with a high volume of sales, thus giving them a high asset turnover ratio.

Can Businesses Improve Their Asset Turnover Ratio?

Yes, businesses may be able to improve this ratio by stocking their shelves with items that are easy to sell and waiting until it is necessary to refill their inventory along with increasing the store’s operating hours to allow time for more shopping, thus hopefully increasing sales. Just-in-time inventory management could help with this. It’s an inventory system in which a business arranges to receive inventory items as close to the time they need them as possible.

Can Businesses Manipulate the Asset Turnover Ratio?

It’s not unusual for managers to try and make their business look more successful than it really is, and accounting figures can be used for this purpose.

One way businesses manipulate the asset turnover ratio is to sell off part of their assets in preparation for a period of declining growth, which will then artificially inflate this ratio.

Another way to manipulate this ratio is for businesses to change their depreciation method for their fixed assets which will affect the ratio in the same way as selling off part of their assets because it changes the value of the business’s assets.

Key Highlights

• The asset turnover ratio compares the net sales of a company to its average assets.
• A business’s asset turnover ratio is useful for comparing with other businesses in the same industry or sector.
• The asset turnover ratio could be affected by larges purchases or sales of assets during the year.
• Investors can use the asset turnover ratio to consider whether or not a business is effectively using its assets to produce revenue.