Definition
An efficiency ratio, the asset turnover rate is a measure of management's ability to use assets to produce sales. It measures the amount of sales (revenues) generated per dollar of assets. As is commonplace with efficiency metrics, the formula uses information from both the balance sheet (assets) as well as the income statement (revenues).
Calculation
Asset Turnover Rate = Sales / Average Assets
Explanation
When determining this rate, the assets that are not contributing directly to sales, such as long-term investments or loans made to officers of the company, should be excluded from this calculation. A higher value of asset turnover suggests that management is making better use of its resources, which could translate into a higher rate of return on total assets.
When drawing conclusions about the relative performance of a company, benchmark comparisons should be made with competitors in the same industry. This is particularly true with this ratio. Industries or companies that have low profit margins will usually have high asset turnover rates.
Example
Last year, Company A had revenues of $29,611,000; assets for the current and prior year were $31,616,000 and $30,156,000 respectively. The company had no long term investments. Using the above formula, asset turnover rate is:
= $29,611,000 / ($31,616,000 + $30,156,000) /2
= $29,611,000 / $30,886,000, or 0.96
Related Terms
Also known as a statement of financial position, the balance sheet is used to show the financial health of a company at a particular point in time. The balance sheet consists of assets, liabilities, and owner's equity in the company. It is one of the four key financial statements issued by public companies.
Moneyzine EditorNovember 6th, 2024
An efficiency ratio, accounts receivable turnover tells the analyst how effectively the company manages the credit extended to customers. The measure is a good indication of the average time needed to convert receivables into cash. The metric relies on information from the income statement (sales) as well as the balance sheet (receivables).Moneyzine EditorNovember 6th, 2024
The inventory turnover ratio tells the analyst how well a company manages its inventory. This metric requires data from both the income statement (revenues) and balance sheet (inventory).Moneyzine EditorNovember 6th, 2024
