What is an asset turnover formula? Plus how to calculate it

By Indeed Editorial Team

Published 25 April 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

The asset turnover ratio is an important metric in business and finance because it helps stakeholders to understand the value of a company's revenue in relation to the value of its assets. This tells executives how efficiently a company is turning assets into profits. A high asset turnover ratio indicates that a company is efficiently turning over assets to generate revenue. In this article, we explore what the asset turnover formula is, how to use it to calculate an asset turnover ratio and provide examples of using the formula to calculate asset turnover ratio in different business settings.

What is the asset turnover formula?

The asset turnover formula is a formula that accountants and executives can use to calculate a company's asset turnover ratio. It's a simple mathematical formula that requires knowledge of both the value of a company's total assets and a company's total revenue. The formula is:

Asset Turnover Ratio = Total revenue / Value of average total assets

To calculate the asset turnover ratio, it's necessary to know a company's total revenue and its average total assets. You can calculate the average total assets by taking the total assets at the beginning of the year and dividing it by 12, or however many months are in the period that you're measuring. Once you have these two figures, you can plug them into the formula to calculate the asset turnover ratio.

Related: What is operating profit? (With examples and calculations)

What is the purpose of the asset turnover ratio?

The asset turnover ratio is useful in several business settings to help executives and accountants understand how efficiently a company is turning over its assets. Stakeholders and business development executives can use this information to streamline business processes and make informed decisions about how to maximise profits and run the business more efficiently. Executives can use the ratio as a benchmark to compare a company's performance against its competitors.

Advantages of asset turnover ratio

There are lots of advantages to using the asset turnover ratio to assess the efficiency of a company's operations:

  • Considers all assets: An asset turnover ratio takes into consideration all assets, which managers can use to assess the effectiveness of both short-term and long-term assets in their business strategies.

  • Excellent for growing companies: Asset turnover ratio can help companies to check if they're creating enough revenue in proportion to their assets. This is important during the growth stage when companies acquire new assets at a faster pace.

  • Can create benchmarks: The asset turnover ratio can create benchmarks against industry averages or other companies' performance, to assess how a company is performing.

  • Helps identify underperforming assets: The asset turnover ratio can help executives to identify that assets are not turning over as quickly as they could.

Drawbacks of asset turnover ratio

There are also some drawbacks to using the asset turnover ratio to assess the efficiency of a company's operations:

  • No information on individual asset performance: This ratio provides information on total asset performance, but no data on individual asset performance, which can make it difficult to judge which assets are underperforming.

  • It includes idle assets: The asset turnover ratio includes idle assets in its calculation, which can create an inaccurate result since those assets which aren't part of the production of profits likely won't create any revenue.

  • Fails to account for running costs: This formula doesn't take running costs into consideration, so assets with high running costs (and thus lower efficiency) are not identifiable.

Related: Total variable cost formula (and how to calculate it)

How to calculate asset turnover ratio

If you're trying to calculate a company's asset turnover ratio, you can use the asset turnover formula to calculate this figure for any business. This can help you understand how efficient the company is and whether a company's assets are creating enough revenue. Follow the steps below to calculate the asset turnover ratio for any company:

1. Identify the value of the company's assets at the start of the fiscal year

The first stage when using this formula is to calculate the total value of all of the company's assets at the beginning of the financial year. Usually, this means adding the total sum of all assets held in the first month of the year. This is the first stage of calculating total assets.

Related: Contingent assets (definition, examples, benefits and tips)

2. Identify the value of the company's assets at the end of the fiscal year

The second stage of calculating total assets is finding the value of the company's assets at the end of the financial year. You can do this by finding the sum total of all assets held in the last month of the fiscal year. This provides a broad overview of the company's total assets in an entire year.

3. Add the value of both sets of assets and divide by two

The next step is adding the value of total assets found in steps one and two and dividing by two. This results in the mean average of total assets held by the company over the course of the year. It's also possible to create a more detailed calculation by adding the value of total assets across all 12 months of the year and dividing by 12.

4. Identify the value of the company's total sales or revenue for the fiscal year

The next stage is finding the value of the company's total sales over the same fiscal year. Sometimes this is on the balance sheet as total revenue. This provides an insight into how much money the company is making and thus how much turnover the company's assets are creating. A high company revenue indicates strong performance unless this revenue comes from large or expensive assets. This ratio can indicate that a company isn't operating efficiently, which you may not realise if you only looked at the revenue.

5. Divide the value of total sales by the value of total assets

The final stage of calculating an asset turnover ratio is dividing the value of the total sales calculated in step four by the value of total assets calculated in step three. This results in a figure which reflects how much revenue a company generates, on average, by the assets that they hold. It's normal to calculate an asset turnover ratio annually. A higher asset turnover ratio means better performance since a company's assets are generating more turnover on average.

Related: How to calculate net profit in 3 steps (with FAQs)

Examples of using the turnover formula

The clearest way to illustrate how to use the formula to calculate an asset turnover ratio is through examples. Business development executives in different sectors can use the asset turnover ratio to identify inefficiencies and compare the performance of two companies within the same sector. Below are some examples of using the turnover formula to make meaningful changes within a business:

Example: Oak Co. furniture company

A furniture company called Oak Co. is calculating its asset turnover ratio for the year. The total value of the company's assets at the start of the year is £60,000, and the total value of assets at the end of the year is £90,000. The sum of these two values divided by two is £75,000, which gives the mean value of total assets across the year. Across the entire financial year, the company made £450,000 total revenue, which they can use to calculate the asset turnover ratio:

Mean average total assets: £75,000

Total revenue: £450,000

Asset turnover ratio: £450,000 / £75,000 = 6

The company's asset turnover ratio is 6. Business development executives can then use this figure to compare their company to their competitors in example 2.

Example: Oak Co. competitor

A competing furniture company operating in the same market publishes its financial data for the year and Oak Co. calculates its asset turnover ratio to compare to their own. This company's assets are worth £60,000 at the start of the fiscal year and £120,000 at the end of the fiscal year, which provides a mean average total asset value of £90,000 over the whole year. The company's total revenue for the year is £765,000.

Mean average total assets: £90,000

Total revenue: £765,000

Asset turnover ratio: £765,000 / £90,000 = 8.5

Oak Co. executives can use the results of this benchmarking test to identify the fact that their assets are significantly less efficient in creating revenue than the assets of their competitors. This means that Oak Co. business development leaders may choose to take action to identify which Oak Co. assets are not generating much revenue and make cuts to these areas to improve overall profits.

Please note that none of the companies, institutions or organisations mentioned in this article are affiliated with Indeed.

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