The total asset turnover is defined as the amount of revenue a company can generate per unit asset. You can use our revenue Calculator and efficiency calculator to understand more on these topics. We have asset turnover formula prepared this total asset turnover calculator for you to calculate the total asset turnover ratio. The total asset turnover ratio tells you how much revenue a company can generate given its asset base.

  1. Its total assets were $3 billion at the beginning of the fiscal year and $5 billion at the end.
  2. The ratio is meant to isolate how efficiently the company uses its fixed asset base to generate sales (i.e., capital expenditures).
  3. Irrespective of whether the total or fixed variation is used, the asset turnover ratio is not practical as a standalone metric without a point of reference.
  4. We have prepared this total asset turnover calculator for you to calculate the total asset turnover ratio.
  5. Suppose company ABC had total revenue of $10 billion at the end of its fiscal year.

Publicly-facing industries including retail and restaurants rely heavily on converting assets to inventory, then converting inventory to sales. Other sectors like real estate often take long periods of time to convert inventory into revenue. Though real estate transactions may result in high-profit margins, the industry-wide asset turnover ratio is low. The asset turnover ratio can also be analyzed by tracking the ratio for a single company over time.

What is the total asset turnover ratio? The meaning of the total asset turnover formula

Being able to assess a company’s efficiency is one of the main steps when analyzing investment opportunities. Hence, it is vital for investors to understand the calculation using the total asset turnover formula. The following article will help you understand what total asset turnover is and how to calculate it using the total asset turnover ratio formula. We will also show you some real-life examples to better help you to understand the concept. Asset turnover ratio results that are higher indicate a company is better at moving products to generate revenue.

Asset Turnover Ratio Example

It can be used to compare how a company is performing compared to its competitors, the rest of the industry, or its past performance. Once this same process is done for each year, we can move on to the fixed asset turnover, where only PP&E is included rather than all the company’s assets. The ratio is meant to isolate how efficiently the company uses its fixed asset base to generate sales (i.e., capital expenditures).

Video Explanation of Asset Turnover Ratio

Average total assets are usually calculated by adding the beginning and ending total asset balances together and dividing by two. A more in-depth, weighted average calculation can be used, but it is not necessary. Hence, we use the average total assets across the measured net sales period in order to align the timing between both metrics. The asset turnover ratio uses the value of a company’s assets in the denominator of the formula.

There are several actions that could trigger this block including submitting a certain word or phrase, a SQL command or malformed data. But, when it comes to evaluating how well company is utilizing its assets, these are only general guidelines. Considering how costly the initial purchase of PP&E and maintenance can be, each spending decision towards these long-term investments should be made carefully to lower the chance of creating operating inefficiencies. Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI’s full course catalog and accredited Certification Programs. All you would need was enough inventory to stock the shelves, you could then lease a store front, and away you go.

Be sure to check out our collection of financial calculators, as well as our blog for tips and tools to help you in your financial analysis. Because telecommunication companies require a heavy asset load to operate and generate revenue. Think about the amount of equipment, cabling, hardware, etc… it takes for Verizon to build out their wireless network. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created to help people learn accounting & finance, pass the CPA exam, and start their career.

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