Sometimes investors also want to see how companies use more specific assets like fixed assets and current assets. This gives investors and creditors an idea of how a company is managed and uses its assets to produce products and sales. The total asset turnover ratio is a general efficiency ratio that measures how efficiently a company uses all of its assets. To get a true sense of how well a company’s assets are being used, it must be compared to other companies in its industry. Some industries use assets more efficiently than others.
Like with most ratios, the asset turnover ratio is based on industry standards. In other words, the company is generating 1 dollar of sales for every dollar invested in assets.
Lower ratios mean that the company isn’t using its assets efficiently and most likely have management or production problems.įor instance, a ratio of 1 means that the net sales of a company equals the average total assets for the year. Higher turnover ratios mean the company is using its assets more efficiently. This ratio measures how efficiently a firm uses its assets to generate sales, so a higher ratio is always more favorable. A more in-depth, weighted average calculation can be used, but it is not necessary. This is just a simple average based on a two-year balance sheet. Net sales, found on the income statement, are used to calculate this ratio returns and refunds must be backed out of total sales to measure the truly measure the firm’s assets’ ability to generate sales.Īverage total assets are usually calculated by adding the beginning and ending total asset balances together and dividing by two.
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