Managing inventory: A low asset turnover could be a result of too much stock.

Therefore, strategic planning is needed to increase the business’s efficiency and productivity.

Low asset turnover can be due to uncollected invoices, inventory problems, production problems, and slow sales.

External stakeholders such as the creditor and investors can use the asset turnover ratio or the fixed asset turnover ratio to assess its management team. The ratio helps businesses to plan ways to increase revenue by making use of new and existing assets. The low ratio means the company has potential assets that can generate revenue, but they are not being used. It means the company’s assets are being put into good use other than being idle.Ī lower asset turnover ratio signifies poor efficiency with which a company operates, which could be due to poor use of fixed assets, lacking collection methods, or limited inventory management. A higher ratio shows that a business is getting more revenue from existing assets.

Importance of the Asset Turnover RatioĪ ratio that measures efficiency is important as it shows a company’s ability to utilize its assets to make sales revenue. ExampleĪt the beginning of a company, the assets were $100000 and $150000 at the end of the year. The asset turnover ratio is calculated on an annual basis.

The company’s average total assets are the average of both long-term and short-term assets for the past two years recorded on its balance sheet. Net sales are the amount generated by a business after discounts, allowances for missing goods or damaged, and cost of returns. The total assets and revenue generated are found on the balance sheet and income statement, respectively.Īsset Turnover Ratio = Total Sales / Average Total Assets It is calculated by taking the net sales and dividing it by the company’s average total assets. A high asset turnover may be seen in companies with older assets compared to a company with the same revenue but is new. The age of the assets in two similar companies will affect their asset turnover ratio. If a company has a total asset turnover ratio 0f 0.7, 70 cents are generated for each dollar of assets invested. It computes the net sales as a percentage of assets to show how much each dollar of a company’s assets generates revenue. If the ratio is high, performance is good. The ratio can be used to determine a company’s performance. The asset turnover ratio is an essential financial ratio used to understand how effective a company is at using its assets to create revenue.

Fixed asset turnover ratio formula