Asset ratios measure the efficiency by which a company is using their assets. These include fixed assets, inventory and receivables. Our first ratio is the total asset turnover ratio.
Asset Turnover Ratio
The total asset turnover ratio is generally applied by management to analyze the company’s performance over multiple periods. They serve as benchmarks or warn of operational issues. Some of the most commonly used asset utilization ratios are described in the following three articles.
The total asset turnover ratio measures the efficiency with which the total assets are utilized in the business to generate revenue. It is calculated as:
An increasing total asset turnover ratio indicates that the firm is increasing the productivity of its assets. For example, if the turnover for year one was 2.2×, and for year two is 3×, it would mean that the firm generated $3 in sales for each dollar of assets, an additional 80 cents in sales per dollar of asset investment over the previous year. These changes can be an indication of increased managerial effectiveness.
When calculating the total asset turnover ratio, assets are noted at the start of the year, and the end of the year, to get an average. This average is then divided by their yearly revenue. An example would be a company having 1 million in assets at the start of the year, and 2 million at years end. They have generated 5 million dollars in revenue . The asset turnover ratio for this company would be
5 million / 1.5 million(average of 1 and 2 million)
When using the total asset turnover ratio, along with the two following ratios to come, make sure you use these ratios to compare companies from the same sector, or research ratios in that sector to determine an average. A internet marketing company may produce very high numbers compared to a steel manufacturing company simply due to the fact the marketers do not need as many assets to produce a product.