The asset turnover ratio is a financial metric used to gauge a company's efficiency. Simply calculated by dividing a company's sales by its total assets, this ratio indicates the dollar amount of revenue a company generates for each dollar of assets it owns. The higher the asset turnover ratio is, the more efficient a company is. Conversely, a low asset turnover ratio indicates that a company is failing to efficiently employ its assets to generate sales.
Let's assume Company ABC and Company XYZ are rival big-box retailers. Let's further assume that last year, ABC earned $500,000 in sales and had total assets of $3 million, resulting in an asset turnover ratio of 0.17. This means that for every $1 worth of assets, that company earned just $0.17 in revenues. Contrarily, let's assume Company XYZ earned $500,000 in sales and had total assets of $200,000, resulting in an asset turnover ratio of 2.50. This means that for every $1 worth of assets, XYZ earned $2.50 in revenues--substantially higher than ABC.
A company may attempt to raise a low asset turnover ratio by diligently stocking its shelves with salable items, replenishing inventory only when necessary, and augmenting its hours of operation to increase customer foot traffic and spike sales.