Asset Turnover Ratio

AAA

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.

VIDEO

RELATED TERMS
  1. Premium to Surplus Ratio

    Net premiums written divided by policyholders’ surplus. The premium ...
  2. Combined Ratio

    A measure of profitability used by an insurance company to indicate ...
  3. Overall Liquidity Ratio

    A measurement of a company’s capacity to pay for its liabilities ...
  4. Capital Loss Coverage Ratio

    The difference between an asset’s book value and the amount received ...
  5. Lapse Ratio

    The lapse ratio represents the percentage of policies that were ...
  6. Quick Liquidity Ratio

    The total amount of a company’s quick assets divided by the sum ...
RELATED FAQS
  1. What are the main income statement ratios?

    Learn how to calculate and interpret some of the most common and insightful financial ratios, like earnings per share, from ...
  2. What are the generally accepted accounting principles for inventory reserves?

    As with most matters related to generally accepted accounting principles (GAAP), accountants assigned with the task of applying ...
  3. What does a high inventory turnover tell investors about a company?

    Inventory turnover is an important metric for evaluating how efficiently a firm turns its inventory into sales.
  4. Why is it sometimes better to use an average inventory figure when calculating the ...

    For a couple of key reasons, average inventory can be a better and more accurate measure when calculating the inventory turnover ...
  5. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ...
  6. Are companies with a negative return on equity (ROE) always a bad investment?

    Any metric that uses net income is basically nullified as an input when a company reports negative profits. Return on equity ...
  7. How do I calculate the inventory turnover ratio?

    The inventory turnover ratio is a key measure for evaluating how efficient management is at managing company inventory and ...
  8. Why is return on investment (ROI) a bad measure for calculating long-term investments?

    Return on investment (ROI) is a useful valuation tool, but it lacks meaning for long-term investments.
  9. How can return on investment (ROI) calculations be manipulated?

    Check out an example of how the return on investment (ROI) for similar investments can vary greatly, depending on how the ...
Related Articles
  1. Fundamental Analysis

    Ratio Analysis Tutorial

    If you don't know how to evaluate a company's present performance and its possible future performance, you need to learn how to analyze ratios.
  2. Fundamental Analysis

    Decoding DuPont Analysis

    Get a deeper understanding of ROE with these three-step and five-step calculations.
  3. Fundamental Analysis

    Measuring Company Efficiency

    Three useful indicators for measuring a retail company's efficiency are its inventory turnaround times, its receivables and its collection period.
  4. Investing

    Asset Turnover Ratio

    Investopedia explains: The asset turnover ratio is a measure of a company's ability to use its assets to generate sales or revenue, and is a calculation of the amount of sales or revenue generated ...
  5. Fundamental Analysis

    An Introduction To Coverage Ratios

    Interest coverage ratios help determine a company's ability to pay down its debt.
  6. Retirement

    Pay Attention To Your Fund’s Expense Ratio

    Despite trends indicating an overall decrease in fees across many fund categories, investors should still pay attention to expense ratios: even small differences in fees can have a significant ...
  7. Investing

    Using Liquidity Ratios

    Learn more about these quick and intuitive ratios you can use to analyze a stock's liquidity.
  8. Budgeting

    Use ROA To Gauge A Company's Profits

    Do you rely too heavily on ROE? Consider using return on assets for a more complete picture.
  9. Forex Education

    8 Simple Investing Ratios You Need To Know

    Investing is a complex and often daunting experience, these equations are actually quite simple.
  10. Retirement

    Turnover Ratios Weak Indicator Of Fund Quality

    This indicator is not as important as some investors might think.

You May Also Like

Hot Definitions
  1. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  2. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  3. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  4. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  5. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  6. Law Of Supply

    A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity ...
Trading Center