This ensures that production continues without any interruption and losses during unavoidable downturns. It is crucial for companies to manage their resources adequately to maintain the operational infrastructure. When the asset turnover ratio is not favourable for the company, it signals the management for increasing its revenue, improving efficiency, improving inventory management, etc. The companies shall strive to maximise the benefits from these assets, which can coincide with increasing the total revenue by minimising the operating waste. It might widely vary if the comparison is made across different sectors.Ī positive trend line of asset turnover ratio can indicate that the company is gradually expanding its capacity. Therefore, investors use this ratio to compare companies in the same sector or industry. On the contrary, a lower turnover ratio indicates that the company is not making the best use of its resources and is more likely to have management or production issues. A higher asset turnover ratio indicates that the company is generating more revenue by using its assets efficiently. This ratio is calculated on an annual basis. The asset turnover ratio is essential for the company to understand how it can maximise its returns for every investment. Therefore, this ratio indicates how efficiently the company generates sales with every rupee invested in its assets.Įxplore our article on What is Portfolio Turnover Ratio? Interpretation and Importance of Asset Turnover Ratio As per the balance sheet, the total assets at the start of the year is Rs.5 lakhs, and the total assets at the end of the financial year are Rs. CalculationĪBC company has a total gross revenue of Rs.20 lakhs at the end of the financial year. The ending assets are the total assets available at the end of the financial year. The beginning assets are the total assets available at the start of the financial year in the balance sheet. The following is the formula to calculate the average total assets.Īverage Total Assets = (Beginning Assets + Ending Assets)/ 2 Net Sales is the revenue after deducting sales returns, discounts and allowances.Īverage total assets are calculated using the balance sheets from the beginning and end of the financial year. The following is the formula for the asset turnover ratio.Īsset Turnover Ratio = (Net Sales/ Average Total Assets) The company calculates the net asset turnover ratio by dividing net sales by average total assets. Comparing companies within the same sector helps them discover which companies are getting the most out of their assets and what weaknesses others might be experiencing. They evaluate the efficiency of the business operations and learn how efficiently the company uses its resources to produce revenue. ![]() Generally, third parties like investors and creditors use this ratio. ![]() ![]() ![]() For instance, a ratio of 0.5 indicates that each rupee of asset generates Rs.0.5 of sales. In other words, this ratio evaluates the company’s gross revenue to the average total number of assets to know how much sales were generated from every rupee of company assets. It measures the company’s ability to generate revenue from its assets. The asset turnover ratio is an efficiency ratio that compares the company’s sales to its asset base.
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