Asset Turnover Ratio
Definition of 'Asset Turnover Ratio'
The amount of sales or revenues generated per dollar of assets. The Asset Turnover ratio is an indicator of the efficiency with which a company is deploying its assets.
Asset Turnover = Sales or Revenues/Total Assets
Generally speaking, the higher the ratio, the better it is, since it implies the company is generating more revenues per dollar of assets. But since this ratio varies widely from one industry to the next, comparisons are only meaningful when they are made for different companies in the same sector.
The Asset Turnover ratio is also a key component of DuPont Analysis, which breaks down Return on Equity into three parts, the other two being profit margin and financial leverage.
Investopedia explains 'Asset Turnover Ratio'
Asset Turnover is typically calculated over an annual basis – either fiscal or calendar year – with the “Total Assets” figure used in the denominator calculated as the average of assets at the beginning and end of the year.
For example, company X may have an asset base of $400 million at the beginning of a given year and $500 million at year-end, with revenues of $900 million generated in that year. The asset turnover ratio for company X is therefore ($900 million / $450 million) = 2.
The asset turnover ratio tends to be higher for companies in a sector like consumer staples, which has a relatively small asset base but high sales volume. Conversely, firms in sectors like utilities and telecommunications, which have large asset bases, will have lower asset turnover.
Consider the asset turnover ratio for Wal-Mart Stores, which in the fiscal year ended January 31, 2013, had total revenues of $469 billion. Wal-Mart’s total assets were $193 billion at the beginning of that fiscal year and $203 billion at fiscal year-end, for an average of $198 billion. Wal-Mart’s asset turnover ratio was therefore 2.37 (i.e. $469 billion/ $198 billion).
In contrast, AT&T had total revenues of $127 billion in the fiscal year ended December 31, 2012. Total assets at the beginning and end of the 2012 fiscal year were $270 billion and $272 billion respectively, for an average asset base of $271 billion. AT&T’s asset turnover ratio in 2012 was therefore 0.47 ($127 billion / $271 billion).
It would obviously make little sense to compare the asset turnover ratios for Wal-Mart and AT&T, since they operate in very different industries. But comparing the asset turnover ratios for AT&T and Verizon, for instance, may provide a clearer picture of asset use efficiency for these telecom companies.
For a specific company, the trend in the asset turnover ratio over a period of time should also be reviewed to check whether asset usage is improving or deteriorating.
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