Asset to Sales Ratio Formula (Table of Contents)
Asset to Sales Ratio Formula
Asset to Sales Ratio formula indicates how much asset a company possesses in regards to the revenue it earns using its assets.
The formula of asset to sales ratio is as follows –
Asset to Sales Ratio Formula Example
Let’s take a practical example to understand this formula.
John wants to look at RMB Company and its asset to sales ratio. John finds out that at the end of the year RMB Company has total assets of $400,000. And John also discovers that last year, RMB Company has revenues of $100,000. What would be the asset to sales ratio of RMB Company?
We will simply put the data into the formula.
- Asset to Sales Ratio formula = Total Assets / Sales
- Or, Asset to Sales Ratio = $400,000 / $100,000 = 4.
- The asset to sales ratio of RMB Company is 4.
- If we get to know the average asset to sales ratio of a similar company under the same industry, we would be able to figure out, whether 4 is a good asset to sales ratio or not.
Explanation of Asset to Sales Ratio Formula
The asset to sales ratio formula is complete opposite of asset turnover ratio formula.
In this ratio, we compare the assets with the revenue the company generates.
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 ratio would be = $100,000 / $50,000 = 2.
To find out the assets, you need to look into the balance sheet of the company.
Sometimes, you need to consider both the beginning assets & ending assets and then average it to get the average total assets.
In that case, the Asset to sales formula then would change to –
For sales, you need to look at the income statement.
You need to remember that “sales” means “revenue” and it has nothing to do with profit of the year. So look straight up in the income statement.
Use of Asset to Sales Ratio
Asset to Sales ratio isn’t a common ratio and not very widely used. However, this ratio can tell a lot about a company and how it is operating.
Let’s say that you, as an investor, have been monitoring the asset to sales ratio of a company for last 2-3 years. You saw that the company had an asset to sales ratio of 5 in the previous year. In 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 in the pace of the increasing of assets); then the assets of the company are under-utilized.
- The second reason can be due to the installation of new machineries, 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 asset to sales ratio to ensure that the assets are properly utilized and the revenue of the company has been increasing in a decent rate. Otherwise, how would you ensure that you would be able to earn a decent return from your investments?
Asset to Sales Ratio Calculator
You can use the following Asset to Sales Ratio Calculator
|Asset to Sales Ratio Formula =||
Asset to Sales Ratio in Excel (with excel template)
Let us now do the same example above in Excel.
This 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.
You can download this asset to sales ratio template here – Asset to Sales Ratio Excel Template
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