There are many tools you can use to analyze the sales performance of your business. You should be aware of the total asset turnover ratio when calculating income at the end of the year because it has implications for your business. Learn how to calculate total asset turnover and what it means for your business in this article.
What Is the Total Asset Turnover Ratio?
The asset turnover ratio measures how efficient the assets of a company are to generate revenue or sales. It compares the dollar amount of sales or revenues to its total assets and is a tool used to measure the value of your company’s assets.
A high total asset turnover ratio is better because it means the company is using its assets in an effective way. It indicates your company is productive and generating little waste. A low asset turnover ratio indicates a company is not effective using its assets to generate revenue.
Each industry has a different asset turnover ratio. For example, a retail business has large sales volumes, so they have a high asset turnover ratio where a real estate firm have large assets but have low asset turnover. Because it varies by industry, there is no “good” asset turnover ratio.
The formula for the total asset turnover is represented as the following:
Net Sales / Total Assets = Total Asset Turnover
Interpreting the Total Asset Turnover Ratio
The best way to interpret your total asset turnover ratio is as an efficiency rating for your business assets. If you find that your ratio is too low, your assets are not contributing enough for revenue generation. Some things you can do to fix this is by replacing or liquidating your assets to be more efficient.
The asset turnover ratio provides a lot of information about your business. It can help pinpoint how efficient it is and spot problem areas before they become a big issue. It is best to calculate the total asset turnover of your business at least every year so you can compare the numbers and see what the trends are and where you can improve. If you notice that each year your ratio goes down it is time you do an analysis of your current assets and your sales process.