What is the Asset to Sales Ratio?
An asset to sales ratio formula calculates total assets divided by total sales of a company; this ratio helps determine the efficiency of a company in managing its assets to generate enough sales for the company to make the assets worthwhile.
Table of contents
Key Takeaways
- The asset-to-sales ratio is calculated by dividing a company’s total assets by its total sales. This ratio measures a company’s efficiency in utilizing its assets to generate revenue, making the assets worthwhile.
- The asset-to-sales ratio is the inverse of the asset turnover ratio, which measures a company’s ability to generate sales from its assets. While the asset turnover ratio focuses on assets, the asset-to-sales ratio puts more emphasis on sales.
- A high asset-to-sales ratio indicates that a company effectively uses its assets to generate revenue. In contrast, a low ratio suggests there may be room for improvement in the company’s asset management practices.
An asset to Sales Ratio Formula
It indicates how much asset a company possesses regarding the revenue it earns using its assets. The formula is as follows –
Assets to Sales Ratio = Total Assets / Sales
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Source: Asset to Sales Ratio (wallstreetmojo.com)
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Explanation
This formula is the complete opposite of the asset turnover ratio formula.
In this ratio, we compare the assets with the company’s revenue.
For example, if a company has $100,000 of assets and its revenue in the current year is $50,000; then the asset to sales would be = $100,000 / $50,000 = 2.
To find out the assets, you need to look into the company’s balance sheet.
Sometimes, you need to consider both the beginning assets & ending assets and then average them to get the average total assets.
In that case, the Asset to sales formula then would change –
Assets to Sales Ratio = Average Total Assets / Sales
For sales, you need to look at the income statement.
It would be best if you remembered that “sales” means “revenue,” and it has nothing to do with the year’s profit. So look straight up in the income statement.
Example
Let’s take a practical example to understand this formula.
John wants to look at RMB Company. John finds out that at the end of the year, RMB Company has total assets of $400,000. And John also discovers that RMB Company had revenues of $100,000. What would be the asset to the sales ratio of RMB Company?
We will put the data into the formula.
- Asset to Sales formula = Total Assets / Sales;
- Or, = $400,000 / $100,000 = 4.
- The ratio RMB Company is 4.
- If we get to know the average ratio of a similar company under the same industry, we will be able to figure out whether 4 is a good ratio or not.
How to Interpret?
An asset to Sales ratio isn’t a common ratio and is not widely used. However, this ratio can tell a lot about a company and its operations.
Let’s say that you, as an investor, have been monitoring this ratio of a company for the last 2-3 years. You saw that the company had a ratio of 5 in the previous year. This year, the ratio is 6. How would you interpret it?
There can be two possible reasons.
- The first reason behind the increased asset to sales ratio is the lack of proper utilization of company assets. If the revenue is not increasing (or not increasing at the pace of the increase of assets), then the company’s assets are under-utilized.
- The second reason can be the installation of new machinery; the sales couldn’t be increased. As a result, you may see an increased asset to sales ratio.
As an investor, you should always look at this ratio to ensure that the assets are properly utilized, and the company’s revenue has been increasing at a decent rate. Otherwise, how would you ensure that you would be able to earn a decent return from your investments?
An asset to Sales Ratio Calculator
You can use the following Calculator
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Calculate Asset to Sales Ratio in Excel (with excel template)
Let us now do the same example above in Excel.
It is very simple. You need to provide the two inputs of Total Assets and Total Sales.
You can easily calculate the ratio in the template provided.
An asset to Sales Ratio Video
Frequently Asked Questions (FAQs)
A good asset-to-sales ratio varies by industry and company, but generally, a lower ratio indicates better efficiency and higher profitability. Companies with high asset-to-sales ratios may have excess assets or inefficient operations, while those with low ratios are generally more streamlined and effective.
The fixed asset-to-sales ratio is a specific version of the asset-to-sales ratio that only considers fixed assets, such as buildings and equipment. On the other hand, the asset-to-sales ratio includes all assets, including current assets like inventory and cash. Both ratios can provide insights into a company’s efficiency and profitability.
An asset-to-sales ratio is a useful tool, but it has limitations. It may not provide a complete picture of a company’s financial health, as it only considers assets and sales and does not consider other factors like debt or expenses. Additionally, the ratio may not be comparable across different industries, as some industries may require more assets than others to generate the same level of sales.
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