Asset Turnover Ratio is the ratio of revenues from products sales to the entire result of the asset balance. Asset turnover ratio shows the efficiency of the company when it comes to the utilizing the assets to make revenue. There is no universal denotation of the ratio – it’s individual. To calculate the ratio, a company needs information about the average of the assets at the beginning of the year and at the end of a financial year and the total number of assets as the denominator.
Asset turnover = R/A, where “R” is Revenue and “A” is Average total assets.
In this formula, it’s important to take into account averaged total assets over the period during which asset turnover is calculated. For instance, if the company evaluates revenues of 2015, then the total assets of the beginning and the end of 2015 should be averaged. In the practice, it looks like:
A company X needs to calculate the asset turnover ratio. It has total revenue of $15 billion at the end of the fiscal year. Its total assets at the beginning of the year comply $5 billion and $9 billion at the end. So, the asset turnover ratio will look like:
- $5 billion + $9 billion)/2 = 7 – total assets
- $15 billion/7 = 2.5