Asset Turnover Ratio
Asset turnover is a financial ratio (frequently alluded to as asset turnover ratio) comparing the overall total sales to the value of the investment or company's total assets. Asset turnover is applied on an annual basis, frequently used to determine the company's level of performance.
- Asset turnover is the ratio of total sales or revenue to average assets.
- This measurement assists investors with understanding how effectively companies are using their assets to create sales.
- A company's asset turnover ratio can be affected by large asset sales as well as huge asset purchases in a given year.
- Investors utilize the asset turnover ratio to compare comparative companies in a similar sector or group.
What Is Asset Turnover Measuring?
The asset turnover ratio estimates the productivity of a company's assets in generating revenue or sales. It compares the dollar amount of sales (revenues) to its total assets as an annualized percentage. Accordingly, to compute the asset turnover ratio, partition net sales or revenue by the average total assets. One variation on this measurement thinks about just a company's fixed assets (the FAT ratio) instead of total assets.
Could Asset Turnover at any point be Gamed by a Company?
In the same way as other accounting figures, a company's management can endeavor to cause its proficiency to look overall more appealing on paper than it really is. Selling off assets to prepare for declining growth, for instance, has the effect of falsely inflating the ratio. Changing depreciation methods for fixed assets can have a comparative effect as it will change the accounting value of the firm's assets.
How Might a Company Improve its Asset Turnover Ratio?
A company might endeavor to raise a low asset turnover ratio by stocking its racks with highly marketable things, replenishing inventory just when vital, and augmenting its hours of operation to increase customer foot traffic and spike sales. Just-in-time (JIT) inventory management, for instance, is a system by which a firm gets inputs as close as conceivable to when they are really required. Thus, in the event that a vehicle assembly plant necessities to install airbags, it doesn't keep a stock of airbags on its racks, yet gets them as those cars go onto the assembly line.
What Is a Good Asset Turnover Value?
Asset turnover ratios change across various industry sectors, so just the ratios of companies that are in a similar sector ought to be compared. For instance, retail or service sector companies have somewhat small asset bases combined with high sales volume. This prompts a high average asset turnover ratio. In the mean time, firms in sectors like utilities or manufacturing will quite often have large asset bases, which means lower asset turnover.
Is It Better to Have a High or Low Asset Turnover?
Generally, a higher ratio is leaned toward on the grounds that it suggests that the company is efficient in generating sales or revenues from its asset base. A lower ratio indicates that a company isn't using its assets efficiently and may have internal issues.