## What Is Asset Turnover Ratio?

The asset turnover ratio is simple but can be extraordinarily useful. It measures how efficiently a company utilizes its assets to generate sales. The ratio compares a company’s net sales to its average total assets (including both current and fixed assets).

This key financial metric is an indication of a company’s operational efficiency. It is also referred to as ‘asset turnover’ or ‘total asset turnover ratio’.

Pro Tip: Use the Asset Turnover Ratio Calculator provided below to streamline your calculations effortlessly.

Key Takeaways:

• The asset turnover ratio assesses how efficiently a company utilizes its assets to generate sales.
• It’s crucial for gauging operational efficiency and is used by investors, lenders, and business leaders.
• Higher ratios indicate better asset utilization, while lower ratios suggest operational inefficiencies or excess assets.
• It’s advisable to compare ratios within the same industry for more accurate assessments.

Remember: Asset turnover isn’t indicative of profitability; it’s vital to assess it alongside profitability metrics for a comprehensive analysis.

## Asset Turnover Ratio Formula

The formula for total asset turnover ratio is net sales divided by average total assets for a given period.

## What Does Asset Turnover Ratio Reveal?

A business with a higher asset turnover ratio than similar companies is operating more efficiently, generating more sales for every dollar’s worth of assets.

This means it needs less capital to achieve the same results as a competitor. For investors and creditors, this (generally) equates to lower risk and higher returns.

A business with a low asset turnover ratio, meanwhile, may have operational inefficiencies to address.

It may be carrying assets that are not pulling their weight, or perhaps its sales performance is weak despite having plenty of resources.

As a result, asset turnover ratios are used by:

• potential investors to help determine whether to invest in a business
• lenders to determine whether or not a business represents a credit risk
• existing investors to assess a company’s performance
• business operators to diagnose and solve problems with asset utilization

## How to Calculate Asset Turnover Ratio

Let’s take a closer look at the variables that go into an asset turnover ratio calculation: net sales and average total assets. Once you collect all the data you need, just scroll down to our asset turnover ratio calculator below, enter your info, and hit “calculate.”

Pro Tip: Asset turnover tends to be calculated on an annual basis so use data for your chosen fiscal or calendar year.

### What Are Net Sales?

Gross sales is your total amount of sales with no deductions. Net sales are what’s remaining once you subtract returns, discounts, and allowances.

The net sales metric gives you a more realistic reflection of your sales because it accounts for:

• partial refunds for defective inventory that customers choose to keep
• price reductions to make slow-moving inventory more attractive
• discounts for early payment of invoices
• damaged and spoiled inventory that can’t be sold
• refunds on inventory that customers return
• sales taxes

Let’s look at an example. Imagine a company has gross sales of \$200k, sales returns of \$3k, sales allowances of \$4k, and discounts of \$6k. We can calculate net sales as follows.

Net sales = \$200,000 – \$3,000 – \$4,000 – \$6,000 = \$187,000

### What Are Average Total Assets?

To calculate average total assets, add the company’s total assets at the beginning and end of the year and divide by two to get an average.

For example, let’s say your business had beginning assets of \$150k for the previous fiscal year, and ending assets of \$200k. Your average total assets would be:

(\$150,000 + \$200,000)/2 = \$175,000

To calculate your total assets at the beginning and end of the year, add together your total liabilities and shareholder equity.

## Asset Turnover Ratio Calculator

Want to skip all of the math? All you have to do is plug in your data into our asset turnover calculator below and hit “Calculate.”

## What Is a Good Asset Turnover Ratio?

A higher asset turnover is preferable, because:

• a higher ratio indicates efficient asset utilization
• a lower ratio indicates inefficient asset utilization

An extremely high turnover ratio might point to severe under-utilization of assets.

### Industry Benchmarks for Asset Turnover

It’s important to note that asset turnover ratios vary significantly by industry.

Asset-heavy industries like real estate and manufacturing tend to have lower asset turnover ratios while software or ecommerce businesses usually have higher asset turnover ratios.

According to CSI Market, retail has the highest asset turnover ratio at an average of 2.55 while energy has the lowest at 0.65.

When assessing a business, it’s always advisable to compare it to businesses in the same industry or even the same sector. Try to find companies that are as similar to yours as possible for greater accuracy.

## Examples of Asset Turnover Calculations

Let’s calculate and compare the asset turnover ratios for 2022 for two companies in the same sector: fashion retailers H&M and The Gap. We’ll also take a look at a company in a different sector to see how its asset turnover ratio differs.

### Example 1: H&M

According to their annual report, H&M has ending assets of approximately 182B, beginning assets of approximately 179B, and net sales of approximately 223B, all in Swedish Krona. Therefore:

Average total assets = (beginning assets + ending assets)/2

= (179 + 223)/2

= 201

We can then plug this value into the asset turnover ratio formula.

Asset turnover ratio = net sales/average total assets

=223/201

= 1.1

In other words, every Swedish Krona worth of assets generates 1.1 Krona worth of net sales revenue. Now that H&M has its asset turnover ratio, it’s time to compare it against competitors. It finds that other comparable retailers have significantly higher ratios so it decides to investigate how those competitors are beating H&M in terms of sales efficiency.

H&M discovers that they are using much cheaper POS systems and cutting down on staff with self-checkout stands so it decides to look into both avenues to improve efficiency and drive greater profits.

### Example 2: The Gap

In their annual report, The Gap lists beginning assets of approximately \$12B, ending assets of approximately \$11B, and net sales of \$15B. Therefore:

Average total assets = (beginning assets + ending assets)/2

= (11 + 12)/2

= 11.5

Now let’s plug this into the asset turnover ratio formula.

Asset turnover ratio = net sales/average total assets

= 15/11.5

= roughly 1.3

So for every \$1 worth of assets, The Gap generates net sales of \$1.30.

The Gap’s asset turnover ratio is slightly higher than H&M’s which tells us that The Gap is making slightly better use of their assets to generate revenue.

This may point to fewer excess assets, better asset maintenance, stronger sales, or more efficient inventory management.

However, you would need to compare your ratio with more than 1 competitor and look at other financial metrics and contextual information to conduct a full, accurate analysis.

### Example 3: Volkswagen Group

Let’s take a look at a business in a completely different industry: vehicle manufacturing. According to Volkswagen’s 2022 balance sheet, they had beginning assets of approximately €528B and ending assets of €564B. Therefore:

Average total assets = (beginning assets + ending assets)/2

= (528+564)/2

= 546

Volkswagen also announced €279B in sales. We can plug their figures into the asset turnover ratio formula as follows:

Asset turnover ratio = net sales/average total assets

= 279/546

= roughly 0.51

Volkswagen’s asset turnover ratio is much lower than H&M’s or The Gap’s.

This is what we would expect because vehicle manufacturing is a more asset-intensive industry than fashion retail. So instead of comparing ratios with clothing retailers it looks at other automakers and finds that it has a much higher ratio than its competitors. With this info, it decides to focus on other metrics to find better opportunities for improvement as it is already on top of the game in efficiency.

## Limitations of the Asset Turnover Ratio

Asset turnover ratio is a useful tool for assessing your company’s financial health but it does have its limitations.

• Asset turnover ratio doesn’t tell you anything about profitability. You could be generating huge net sales at a loss or making very little profit. Use asset turnover ratio in conjunction with a profitability ratio, such as return on assets, to get a (more) full picture.
• Asset turnover ratio can be artificially skewed by certain factors such as if a company:
• Makes significant asset purchases because it’s expecting to grow;
• Is selling assets in preparation for a period of declining growth;
• Has an excess of cash holdings;
• Outsources production and therefore has fewer assets on the books.

Examine the asset turnover ratio in context to avoid being misled by these distortions.

• For some businesses, sales are cyclical or seasonal which means the asset turnover ratio looks artificially low or high if calculated at certain times. You can avoid this problem by calculating the asset turnover ratio for multiple periods so you can spot long-term trends.

## 5 Ways to Improve Your Asset Turnover Ratio

A high asset turnover ratio can also help boost your share price if you’re publicly listed.

To improve your asset turnover you can either:

• Increase net sales;
• Cut total assets.

1. Improve your inventory management. On the balance sheet, inventory is recorded as a current asset. Carrying excess inventory will therefore lower your asset turnover ratio. You can:- Gather more precise inventory data to identify unpopular products and track seasons and trends
– Use Just-in-Time inventory management to minimize excess
– Offer discounts and product-bundling on slow-moving inventory
– Rethink unpopular products
2. Boost sales by lowering or increasing prices, tackling returns, optimizing your opening hours, collecting outstanding invoices, adding new sales channels (e.g. online or click and collect), boosting average transaction size, or investing in sales training and staff.
3. Create new revenue streams using your existing assets. If you sell boats, for example, you could partner with an insurer to sell boat insurance or warranties to extract additional value from your existing stock and retail outlets. Or if you have a yoga studio, you can sublet the space for events.
4. Audit your assets. Ask yourself if it would be more efficient to lease any of your assets instead of owning them. Question whether all the company’s assets are adding value or if it would be better to sell or replace some of them. A retail property in a poor location, for example, could negatively impact sales.
5. Do a competitor analysis. Do your industry peers own the same assets as you do? Do they use them in the same way? Do they have different products or sales and marketing techniques that help generate sales? For example, if you own a courier business, do your industry peers own or lease their vehicles and what kind of vehicles are they operating? Always be on the lookout for better methods or strategies that the competition is utilizing to great success.

## Asset Turnover Ratio Vs. Fixed Asset Turnover Ratio

Asset turnover ratio and fixed asset turnover ratio are similar but they aren’t the same thing. Both assess how efficiently a business can use its assets to generate sales. They give you indications of operating performance and, in both cases, a higher turnover ratio indicates greater efficiency and is therefore preferable to a lower ratio.

The difference between these metrics is that asset turnover ratio measures sales relative to all of a company’s assets (both current assets and fixed assets) while fixed asset turnover ratio looks only at a company’s fixed assets.

Fixed asset turnover ratio is most used in industries with a lot of fixed assets, like manufacturing, while asset turnover ratio is more useful for industries that are less reliant on fixed assets, such as retail and software.

### What Are Fixed Assets?

Fixed assets are tangible or physical assets that a company expects to use in its business operations for at least one year. Examples of fixed company assets include property, vehicles, and equipment.

Assets that are not fixed are called current assets. These are assets that a company expects to turn into cash within one year. They include things like cash, rent, and inventory.

### Formula for Fixed Asset Turnover Ratio

The formula for fixed asset turnover ratio is the same as the formula for asset turnover ratio except that the denominator is average fixed assets, not average total assets.

## How To Interpret the Asset Turnover Ratio (The Easy Way)

The asset turnover ratio provides valuable insights into a company’s operational efficiency and sales effectiveness.

Here’s how to interpret this key financial metric:

1. Efficiency Measure: The asset turnover ratio measures how effectively a company utilizes its assets to generate sales. A higher ratio indicates better asset utilization, suggesting that the company is efficiently converting its assets into revenue.
2. Comparison with Industry Benchmarks: It’s essential to compare the asset turnover ratio with industry benchmarks to gauge performance relative to competitors. Industries with different business models and asset structures may have varying average ratios, so context is crucial.
3. Operational Effectiveness: A declining asset turnover ratio over time may signal operational inefficiencies or declining sales performance. Conversely, an increasing ratio indicates improving operational effectiveness and sales efficiency.
4. Asset Utilization Trends: Analyzing the trend of the asset turnover ratio over multiple periods provides valuable insights into the company’s asset utilization trends. Consistently declining ratios may warrant further investigation into potential operational issues or changes in business strategy.
5. Profitability Considerations: While a higher asset turnover ratio is generally favorable, it’s essential to consider profitability alongside asset utilization. A high ratio may not necessarily translate to higher profitability if the company is sacrificing margins for increased sales volume.
6. Contextual Analysis: Contextual factors such as industry dynamics, economic conditions, and company-specific factors should also be considered when interpreting the asset turnover ratio. These factors can influence the ratio’s significance and provide deeper insights into the company’s performance.
7. Strategic Implications: Understanding the drivers behind changes in the asset turnover ratio can inform strategic decision-making. Whether it’s optimizing inventory management, enhancing sales strategies, or investing in asset utilization improvements, interpreting the ratio can guide strategic initiatives aimed at driving business growth and profitability.

By interpreting the asset turnover ratio in conjunction with other financial metrics and contextual factors, stakeholders can gain a comprehensive understanding of a company’s operational efficiency and sales performance, enabling informed decision-making and strategic planning.

## Final Thoughts: Don’t Underestimate the Power of Sales Efficiency

Businesses and their investors want to transform capital into as much revenue and shareholder equity as possible.

That much is obvious but some leaders don’t know where to start.

Optimizing your asset utilization is a great way to ensure that your business is as efficient as possible.

The fixed asset turnover ratio helps you judge a business’s success in this area so you can compare it with the competition, make informed investment decisions, and make the most of your capital.