Asset turnover (total asset turnover) is a financial ratio that measures the efficiency of a company's use of its assets to product sales. It is a measure of how efficiently management is using the assets at its disposal to promote sales. The ratio helps to measure the productivity of a company's assets.
Asset turnover = Revenue / Average total assets
or in days = 365 / Asset turnover
The numerator of the asset turnover formula shows revenues which are found on a company's income statement (statement of comprehensive income) and the denominator shows total assets which is found on a company's balance sheet (statement of financial position).
Norms and Limits
There is no set number that represents a good total asset turnover value because every industry has varying business models. It also depends on the proportion of labour costs in relation to the capital required, i.e. whether the process is labour intensive or capital intensive.
The higher the number, the better. If there is a low turnover, it may be an indication that the business should either utilize its assets in a more efficient manner or sell them. But it also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover.
It should be noted that the asset turnover ratio formula does not look at how well a company is earning profits relative to assets. The asset turnover ratio formula only looks at revenues and not profits. This is the distinct difference between return on assets (ROA) and the asset turnover ratio, as return on assets looks at net income, or profit, relative to assets.
Exact Formula in the ReadyRatios Analytic Software
Asset Turnover ratio = F2[Revenue] / ((F1[b][Assets] +F1[e][Assets])/2)
F2 – Statement of comprehensive income (IFRS).
F1[b], F1[e] - Statement of financial position (at the [b]eginning and at the [e]nd of the analizing period).