What does total asset turnover mean

In other words, this ratio shows how efficiently a company can use its assets to generate sales. The total asset turnover ratio calculates net sales as a percentage of assets to show how many sales are generated from each dollar of company assets.

For instance, a ratio of. Average total assets are usually calculated by adding the beginning and ending total asset balances together and dividing by two. This is just a simple average based on a two-year balance sheet. A more in-depth, weighted average calculation can be used, but it is not necessary. This ratio measures how efficiently a firm uses its assets to generate sales, so a higher ratio is always more favorable. For example, a company may have made significant asset purchases in anticipation of coming growth or have gotten rid of non-core assets in anticipation of stagnating or declining growth — and either change could artificially increase or decrease the asset turnover ratio.

Another consideration when evaluating the asset turnover ratio is how capital-intensive the industry that the company operates in is i. Companies with fewer assets on their balance sheet e. To follow along, fill out the form below to get access to the file. We now have all of the required inputs to calculate the total asset turnover ratio, which takes the net sales for the current period and divides it by the average asset balance of the prior and current periods.

Upon doing so, we get 2. Considering that the total turnover ratio increased from 2. We're sending the requested files to your email now. If you don't receive the email, be sure to check your spam folder before requesting the files again. Get instant access to video lessons taught by experienced investment bankers. Login Self-Study Courses. Financial Modeling Packages.

Industry-Specific Modeling. Real Estate. Professional Skills. Finance Interview Prep. Corporate Training. But whether a particular ratio is good or bad depends on the industry in which your company operates. Some industries are simply more asset-intensive than others are, so their overall turnover ratios will be lower. For example, a service business that runs primarily on "brain power," such as a financial advisory firm, doesn't require as many physical assets as, say, a delivery company that must maintain a fleet of vehicles.

If you see your company's asset turnover ratio declining over time but your revenue is consistent or even increasing, it could be a sign that you've "overinvested" in assets.

It might mean you've added capacity in fixed assets — more equipment or vehicles — that isn't being used. Or perhaps you have assets that are doing nothing, such as cash sitting in the bank or inventory that isn't selling.