What is Asset to Sales Ratio?
An asset to sales ratio formula calculates total assets divided by total sales of a company; this ratio helps in determining the efficiency of a company in managing its assets to generate enough sales for the company so as to make the assets worthwhile.
An asset to Sales Ratio Formula
It indicates how much asset a company possesses in regards to the revenue it earns using its assets. The formula is as follows –
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For eg:
Source: Asset to Sales Ratio (wallstreetmojo.com)
Explanation
This formula is the complete opposite of the 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 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 –
Assets to Sales Ratio = Average Total Assets / Sales
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 a profit of the year. 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 last year, RMB Company has revenues of $100,000. What would be the asset to the sales ratio of RMB Company?
We will simply 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 would 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 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 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 assets of the company are under-utilized.
- The second reason can be due to 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 revenue of the company 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
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This article has been a guide to Asset to Sales Ratio. Here we discuss the formula to calculate Asset to Sales Ratio, its interpretation along with a practical example and excel templates. You may also have a look at these articles below to learn more about Financial Analysis –
