Calculate the Asset Turnover Ratio

By Stock Research Pro • July 27th, 2009

The asset turnover ratio is used to measure the relationship the company assets and its revenues. The calculation provides an indication of how efficient the company is in leveraging its assets. High and/or improving asset turnover ratios are generally favorable for a company. A low asset turnover ratio can indicate efficiencies or obsolete fixed assets.

Applying the Asset Turnover Ratio

Examining asset turnover can help understand the company’s pricing strategy as those companies with high profit margins have low asset turnover while those with lower profit margins typically show high asset turnover.

In general, the asset turnover measure is more applicable to growth companies as it can provide an indication as to whether the company is maintaining a high level of efficiency as its revenues increase.

Variations of Asset Turnover Ratios

Fixed Asset Turnover: The fixed asset turnover ratio is used to evaluate the company’s effectiveness in generating revenues while only looking at investments in property, plant, and equipment. The higher the measure, the more efficiently these investments are performing. This ratio should be closely monitored in the year following any major investments in fixed assets.

The formula for fixed asset turnover can be written as:

Fixed Asset Turnover = Net Sales / (Net Property, Plant, & Equipment)

Total Asset Turnover: Unlike fixed-asset turnover, total asset turnover is used to evaluate a company’s efficiency in managing all of its company. Like the fixed asset turnover ratio, the higher the higher the measure, the better. A company that maintains a low level of inventory and efficient collections will often produce a favorable total asset turnover measure.

The formula for total asset turnover can be written as:

Fixed Asset Turnover = Net Sales / Total Assets


The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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