Are you taking the maximum advantage out of your business assets? Is your turnover increasing against the investment of your business asset? You can get the answer by knowing what is asset turnover ratio. This may seem complex but it’s a simple process. So, here is all you need to know to work out the asset turnover ratio and to find out how well your business is using its assets to generate revenue. Let’s kick off with the definition of it.
What is Asset Turnover Ratio?
Assets are the things that are used by your business to generate profit. It includes machinery, equipment, furniture, vehicles, stock and cash. In addition, the asset turnover ratio helps you to know how efficiently your business is using its assets to generate profit/sales. And, a company with a high turnover ratio is considered more efficient than a business with a lower ratio.
The asset turnover ratio is equal to the Revenue (sales) divided by the net assets of the company. Here is the simple formula:
Asset Turnover= Revenue(sales) / Net Assets
Revenue =Annual Sales minus refunds or returns
Net Assets= Total assets minus total liabilities
If a company has a revenue (sales) of £22,000 and contains Net assets of £4000, the revenue would be divided by the net sales that equal 5.5 (asset turnover ratio). It is calculated as under:
Asset Turnover= £22,000/ £4000 = 5.5
Let’s take another example where a company’s revenue is £19,700 with net assets of £3,200. After the division, the asset turnover ratio would be 6.1.
Things to Consider While Calculating Asset Turnover Ratio
- You need to know that this number varies to a great extent from industry to industry. Businesses dealing with capital may have lower asset turnover compared to businesses with low net assets and high revenue.
- The figure of this ratio also differs enormously on annual basis. For instance, a business can make investments in one year but the revenue might not generate until the next year.
- This ratio doesn’t measure the profitability of the revenue generated directly.
Importance of Asset Turnover Ratio
It is important to determine this ratio as it compares companies that are operating within the same industries to find out that a company is producing more revenue from its assets. Along with this ratio, companies can also use other efficiency ratios like working capital and fixed asset turnover ratio to know how well a company is utilizing its asset to generate revenue.
Quick Sum Up
Hopefully, you have got a firm grasp of what is asset turnover ratio and how it is calculated. To sum up, we can say that it is the ratio to measure the company’s efficiency to use assets to generate sales. A higher ratio is considered favourable for a company and shows that it is using its asset at its best. On contrary, a lower ratio depicts that a company is not utilising its assets fully to get sales. This might be due to the extra production capacity, or poor inventory management, etc. Remember that this ratio varies from industry to industry. Industries having a below-average margin of profit needs to generate more ratio, whereas capital-intensive industries need to have a lower asset turnover ratio.
Whether you’re a new business owner or veteran, you can’t manage the business finances yourself as you lack the expertise in the field that can lead to troubles. So, it’s advisable to get help Cheap accountant in London for the accuracy and reliability of your accounts.
Get an instant quote right away!
Disclaimer: This blog provides general information on the asset turnover ratio.