To calculate the asset turnover ratio, you first need to work out the average asset value for the year:įrom there, you can use the formula to work out the asset turnover ratio: The business invested a $10,000 piece of equipment during the year, bringing its asset value at the end of the year to $50,000. At the end of the financial year, ABC Company had net sales totalling $100,000.Īt the beginning of that year, the total value of ABC Company’s assets was $40,000. Let’s say ABC Company operates in the retail sector, which has an average asset turnover ratio of 2.1. To put it another way, the asset turnover formula is: Divide by your total average asset value: You can calculate this by finding the average of the beginning and ending asset values of the period you’re looking at, such as a year.
ASSET TURNOVER RATIO HOW TO
Learn more about how to calculate net sales. Find out your total net sales: This is the amount of revenue generated minus sales returns, discounts, and sales allowances.There are two steps to calculate your asset turnover ratio: To that end, it’s a good idea to compare your asset turnover ratio with averages for your industry to get the most accurate picture of your business’s performance. On the other hand, industries with significant assets, such as real estate and utilities, tend to have a low asset turnover rate. Keep in mind that the average asset turnover ratio tends to be higher for businesses in some industries than in others.įor example, the retail and grocery industries typically have relatively small asset bases but a high sales volume, meaning they have a high average asset turnover ratio. Investors and lenders can also look at your asset turnover ratio to help figure out how well your business is run. Inefficient production or management processes.Factors that can contribute to a low asset turnover ratio include: Operations are productive and the business functions like a well-oiled machine.Ī low asset turnover ratio indicates that a business isn’t using its assets as efficiently as it could be. A high asset turnover ratio signals that a business is using its assets efficiently to generate sales.
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