Understanding Asset Turnover Ratio

Asset turnover ratio is a profitability ratio that measures how efficiently a company utilizes its assets to generate revenue, and it is based on an annual basis. It is calculated by dividing total sales by average assets.

This financial tool is helpful to analyze the company's ability to generate sales using its assets. The higher value of asset turnover ratio indicates the company is performing better.

The formula to derive Asset Turnover Ratio



Total Sales - It is a sum of total sales revenue generated by the company from its operations, and it is found in the company's Income Statement.

Average Assets - Average Assets are the sum of total assets of the current year and previous year divided by two. Total assets are found in the company's Balance Sheet.

Example of Asset Turnover Ratio: For the financial year Adani Ports and Special Economic Zone ltd. reported Total Sales of Rs. 4556.81 Cr. and the average asset as Rs. 6191 Cr.
The value as per the Formula [Asset Turnover Ratio = (Total Sales / Average Assets) x 100] is calculated as (4556.81 / 6191 = 73.60 %).

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Key Highlight

Companies with high asset turnover are considered good. The asset turnover ratio shows the ability of a company to utilize its assets. It is calculated by dividing total sales by average assets.

The asset turnover ratio is helpful to analyze the company's ability to generate sales using its assets.

Comparing the asset turnover ratio of the company with its peers that operate in the same industry will give a better understanding while doing analysis.

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While looking at Asset Turnover Ratio, the following points should also take into consideration:

Investors should look for a higher ratio. The higher the asset turnover ratio, the better it is. It indicates that the company is efficient in utilizing its assets to generate revenue. A high ratio can be the reason of company's sales are high compared to its assets.

Asset turnover ratio of 50% or higher is generally considered good. The ideal range of this metric differs from industry to industry.

A low ratio of the company can be due to sales being less compared to its revenue. Or the company is not efficiently managing its asset to generate revenue.

This metric is based on an annual basis, and it tells the amount of sales a company is able to generate by utilizing its assets. It indicates whether the company is managing its asset utilization efficiently or not.

Asset Turnover Ratio is expressed in absolute number as well in percentage. On Top Stock Research, we expressed it in percentage throughout the site.

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How to use Asset Turnover Ratio effectively

Companies with high asset turnover are considered good. The asset turnover ratio shows the ability of a company to utilize its assets to generate revenue.

For relative valuation, always compare companies that operate in the same industry. Comparing the company that operates in the IT industry to the company that operates in the automobile industry will be useless for analysis. The IT industry needs fewer assets comparative to the automobile industry or any other capital-intensive industry, so the asset turnover ratio of the IT industry will be higher compared to the automobile industry.

While analyzing the company, check the past performance over year for better understanding. Analyzing the company's historical data will give a better understanding of the company's past performance.

Continuous growing company year over year is good as it indicates that the company is improving continuously. But in some scenarios, past performance may not matter that much because the industrial and economical factors also affect it.

For better analysis, we must look at other financial metrics with Asset Turnover Ratio, like Return on Assets (ROA), Return on Capital Employed (ROCE), Return on Equity (ROE), Inventory Turnover Ratio, Debt to Assets, CFROA, etc.,

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