# Asset Turnover Ratio

Asset turnover ratio measures a company's balance sheet efficiency. Learn more about asset turnover ratios, formulas, and definitions.

## What is Asset Turnover Ratio?

Asset turnover is the ratio of total revenue to total assets. A higher asset turnover ratio means the company is more efficient at generating sales from the company’s assets.

If a company has a low turnover ratio, this might be an indicator that assets on the balance sheet could be put to better use. That said, what is a “good” or “bad” ratio depends on the maturity of the company and their particular industry. Executives and investors often compare asset turnover ratios across a market segment to get a sense if a business is managed well.

The Asset Turnover Ratio formula is:

Asset Turnover Ratio = Total Revenue / Average Total Assets

Asset Turnover Ratio = \$1,000,000 / \$400,000

Asset Turnover Ratio = 2.5x

But there are a few important variations and definitions to keep in mind.

First, asset turnover ratio is often called “total asset turnover ratio” or simply “asset turnover”. You should keep in mind that all three of these names refer to the same formula.

Second, in finance and accounting, the terms “income” and “sales” are used interchangeably with “revenue”. As a result, you will see the asset turnover ratio presented with all of these terms.

Most often, asset turnover ratio is calculated over a single year. Since a company’s assets will fluctuate throughout the year, it is important to use the average total assets in the calculation.

If a company’s average assets are given to you, then you can use that number. Otherwise you will need to calculate it before continuing.

Thus, the formula can be extended to:

Asset Turnover Ratio = Total Revenue / ((Beginning Total Assets + Ending Total Assets) / 2))

Asset Turnover Ratio = \$1,000,000 / ((\$300,000 + \$500,000) / 2))

Asset Turnover Ratio = \$1,000,000 / (\$800,000 / 2)

Asset Turnover Ratio = \$1,000,000 / \$400,000

Asset Turnover Ratio = 2.5x

It’s important to remember what this accounting ratio tells us. Asset turnover ratio measures how efficient a company is at utilizing its balance sheet assets to generate income, which is presented on the income statement.

## Asset Turnover Examples

Here are two example companies that illustrate the use of the accounting ratio.

Company A

• Total Revenue, 2020: \$800,000
• Average Total Assets, 2020: \$600,000

Company B

• Total Revenue, 2020: \$550,000
• Beginning Assets, 2020: \$220,000
• Ending Assets, 2020: \$280,000

With Company A, we are given average total assets so we can use the shorter version of the formula.

Company A Asset Turnover Ratio = \$800,000 / \$600,000

Company A Asset Turnover Ratio = 1.33x

Meanwhile, Company B provided the balances for the beginning of the period and the end of the period, so we have to do the longer calculation.

Company B Average Total Assets = (\$220,000 + \$280,000) / 2

Company B Average Total Assets = \$500,000 / 2

Company B Average Total Assets = \$250,000

Great, now we can use the regular asset turnover formula.

Company B Asset Turnover Ratio = \$550,000 / \$250,000

Company B Asset Turnover Ratio = 2.20x

So what does this all mean? While Company A has more revenue and appears to be the bigger company, Company B is much more efficient at generating sales from its assets. All things equal, companies want a high turnover ratio, which allows them to spend less on assets in order to generate the same revenue as their competitors.

## What is Fixed Asset Turnover?

Fixed asset turnover measures a company’s utilization of fixed assets. Certain industries require significant investment into land, buildings, factories, machinery, and other long-term assets. In accounting, these investments are bunched into a category called plant, property, and equipment or PP&E for short.

To measure the productivity of these long-term assets, it’s helpful to look at only fixed assets and ignore the variability of current assets. (As a reminder, current assets include items like cash, marketable securities, accounts receivable, and prepaid expenses. These assets are highly variable and can introduce noise into the asset turnover ratio.)

That’s where the fixed asset turnover ratio comes into play. As the name suggests, the fixed asset turnover ratio measures how effective a company is at utilizing its fixed assets, which are defined as assets with a shelf life of more than 1 year.

## Fixed Asset Turnover Ratio & Formula

The following formula is for fixed asset turnover:

Fixed Asset Turnover Ratio = Total Revenue / Average Fixed Assets

Fixed Asset Turnover Ratio = \$2,400,000 / \$1,600,000

Fixed Asset Turnover Ratio = 1.5x

As mentioned above, we have to be careful to use average fixed assets and the average must match the period that we are evaluating. For example, if we are looking at the fixed asset turnover for 1 year, then we must take the average of fixed assets over the course of that year.

You cannot simply take the ending fixed asset balance when trying to solve for the fixed asset turnover ratio.

## Fixed Asset Turnover Ratio Examples

Here are two example companies that illustrate the use of the fixed asset turnover ratio.

Company C

• Total Revenue: \$800,000
• Average Total Assets: \$600,000
• Average Fixed Assets: \$500,000

Company D

• Total Revenue: \$550,000
• Starting Total Assets: \$220,000
• Ending Total Assets: \$280,000
• Starting Fixed Assets: \$200,000
• Ending Fixed Assets: \$260,000

In the examples above, we are given more information that we need so we must be careful when calculating the fixed asset turnover ratio. Let’s start with Company C, which provided us with the average fixed assets.

Company C Fixed Asset Turnover Ratio = Total Revenue / Average Fixed Assets

Company C Fixed Asset Turnover Ratio = \$800,000 / \$500,000

Company C Fixed Asset Turnover Ratio = 1.6x

For Company D, we have to first calculate average fixed assets then use that in our formula. We’re going to do it all in one step in the following formula, but you can break it up into smaller steps.

Fixed Turnover Ratio = Total Revenue / ((Beginning Fixed Assets + Ending Fixed Assets) / 2))

Asset Turnover Ratio = \$550,000 / ((\$200,000 + \$260,000) / 2))

Asset Turnover Ratio = \$550,000 / (\$460,000 / 2)

Asset Turnover Ratio = \$550,000 / \$230,000

Asset Turnover Ratio = 2.39x

The result? If these companies are in the same industry, then Company D is much more efficient than Company C.

## What is a Good Asset Turnover Ratio?

Asset Turnover Ratio is highly dependent on company stage and industry. According to CSI Market, the ratio in retail is 2.19x while it’s as low as 0.21x in the financial services industry.

As with other accounting ratios, context is very important. When looking at your retail business, a low turnover ratio would be anything below 1.5x and a high turnover ratio would be anything above 2.5x.

However, a financial service’s company would be lucky to get anything above 0.40x. We suggest looking at your company’s ratio month-over-month in order to determine how to improve your operations.

Regardless of industry, all companies will want higher ratios as that represents a more productive use of cash.

## Using Asset Turnover Ratio to Your Advantage

Asset turnover ratio is a powerful tool to compare your company’s efficient period over period. It’s important to note that you must match your average calculation to the time interval.

It’s typical to look at this ratio yearly, in which case you would use beginning of the year and end of the year values. To calculate asset turnover monthly, you must look at (also called net sales) and average assets for the month.

January Asset Turnover = January Revenue (Net Sales) / Average January Total Assets

A more detailed way of the average calculation for assets would be averaging every day’s balance, instead of just the beginning and end of the month. However, in most cases, you will not get this granular.

The DuPont analysis is a more detailed way of looking at a company’s return on equity (ROE).

DuPont Analysis = Net Profit Margin x Asset Turnover x Equity Multiplier

Net profit margin is defined as net income divided by total revenue. Asset turnover is the same ratio we have been discussing above. The equity multiplier is average total assets divided by average shareholders’ equity.

Here is an example for Microsoft Corporation for the fiscal year 2007:

DuPont Analysis = Net Profit Margin x Asset Turnover x Equity Multiplier

DuPont Analysis = 0.275 x 0.809 x 2.031

DuPont Analysis = 0.4508

DuPont Analysis = 45.08%

The asset turnover ratio is one part of the DuPont analysis, with the other two parts being fairly easy to calculate as well. We suggest that companies use this deconstructed view of ROE to get a sense of where their return comes from – from a high profit margin, high asset turnover, or high equity multiplier.

## Final Thoughts

Asset turnover ratio, when used properly, is a powerful metric that lets you understand a company’s operational efficiency at a glance.

Here is the summary on asset turnover:

• Asset Turnover Ratio = Total Revenue / Total Assets
• Total revenue can also be referred to as total income or total sales, but the asset turnover ratio formula is unchanged
• Asset turnover ratio measures how efficient a company is at generating sales from its assets, this accounting ratio is used to measure companies within the same industry
• Fixed asset turnover ratio is a variation of this ratio, it is calculated as total revenue divided by fixed assets
• All things equal, companies want a high asset turnover ratio
• There are only two ways to increase your asset turnover ratio, by increasing sales or by reducing the assets needed to generate your current sales

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