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Asset Turnover Ratio Formula: What is the formula?
Asset turnover ratio is an efficiency ratio that judges how efficiently a company uses its assets to generate revenue.
Here’s the asset turnover ratio formula –
Explanation of Asset Turnover Ratio Formula
Asset turnover ratio formula is the opposite of asset to sales ratio. In this ratio, we look at the net sales and average total assets.
In the income statement, the first item is “gross sales”.
If we deduct “sales discount” or “sales return” from “gross sales”; we would get “net sales”.
On the other hand, to find the average total assets we need to look at the assets at the beginning of the year and the assets at the end of the year. And then we can take the average of the assets at the beginning and the assets at the ending.
If we want to go deep, we can use the weighted average method to calculate the average total assets.
Use of Asset Turnover Ratio
Unlike the asset to sales ratio, in the case of asset turnover ratio, more is better.
If asset turnover ratio is more, it indicates that the assets of the company are properly utilized and vice versa.
For example, if we find that the asset turnover ratio is 0.6; that means net sales are 60% of the average total assets. Now, if the asset turnover ratio is 1; then the net sales are 100% of the average total assets.
When a company buys new machinery, the sole objective is to increase the sale.
By installing new machineries, the company can produce more products, and sell out more products as well.
As a result, the revenue of the company increases along the way.
However, if installing new machineries don’t result in increase in sales; that means either the machineries are defective or the company isn’t able to utilize the assets properly.
Asset Turnover Ratio Formula Example
Now, let’s take a practical example of asset turnover ratio.
YMC Company has gross sales of $75,000 at the end of 2017. The sales return for the year was $5000. The total assets at the beginning of the year were $120,000 and at the end of the year were $160,000. Find out the asset turnover ratio of YMC Company.
First of all, we need to calculate net sales.
- We have gross sales and that is $75,000.
- We also have sales return and that is $5000.
- Then, the net sales would be = ($75,000 – $5000) = $70,000.
Now, we will calculate the average total assets by using the simple average method.
- The total assets at the beginning of the year were $120,000. And the total assets at the end of the year were $160,000.
- Then, the average total assets for the year would be = ($120,000 + $160,000) / 2 = $280,000 / 2 = $140,000.
Now, we will put the data into the formula.
- Asset Turnover Ratio formula = Net Sales / Average Total Assets
- Or, Asset Turnover Ratio = $70,000 / $140,000 = 0.50.
If we compare the asset turnover ratio of YMC Company with the asset turnover ratio of a similar company under the same industry, we would be able to tell 0.50 is a good number or not.
Asset Turnover Ratio Calculator
You can use the following Asset Turnover Ratio Calculator
|Assets Turnover Ratio Formula =||
Asset Turnover Ratio in Excel (with excel template)
Let us now do the same example above in Excel.
This is very simple. First, we need to calculate the net sales and then we will calculate the average total assets by using the simple average method.
You can easily calculate the ratio in the template provided.
You can download this asset turnover ratio template here – Asset Turnover Ratio Template