Asset Turnover Ratio Formula

Asset Turnover Ratio Formula (Table of Contents)

• Asset Turnover Ratio Formula
• Asset Turnover Ratio Calculator
• Asset Turnover Ratio Formula in Excel (With Excel Template)

Asset Turnover Ratio Formula

The asset turnover ratio is one of the ratios that measure the efficiency of a company by finding the amount of revenue generated from its assets.

Here’s the Asset Turnover Ratio formula –

Examples of Asset Turnover Ratio Formula

Let’s take an example to find out the Asset Turnover Ratio for a company: –

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Asset Turnover Ratio Formula – Example #1

Let’s take an example for a firm X: –

• Net Sales = $100000
• Total Assets for the year 2018 = $20000
• Total Assets for the year 2019 = $30000

Average Total Assets Calculated as:

• Average Total Assets = ($20000 + $30000) / 2
• Average Total Assets = $25000

Asset Turnover Ratio is calculated as:

• Asset Turnover Ratio = Net Sales / Average Total Assets
• Asset Turnover Ratio = $100000 / $25000
• Asset Turnover Ratio= $4

This indicates that for company X, every dollar invested in assets generates $4 in sales.

Asset Turnover Ratio Formula – Example #2

Let us take a practical example of companies operating in the petrochemicals industry for whom asset turnover ratio is important as they have to invest a large amount in capital expenditure.

We take the example of Indian Petrochemical companies Indian Oil Corporation (IOCL), Hindustan Petrochemicals (HPCL), and Bharat Petroleum (BPCL).

From the above table, one can see that BPCL has the highest asset turnover ratio of 2.87 which means for every 1 rupee invested in assets 2.87 rupees sales are generated. IOCL has the lowest asset turnover ratio of the three companies but at least it is greater than 1 which is a good sign.

Asset Turnover Ratio Formula – Example #3

Asset Turnover Ratio is used in multiple ways, one of which is its usage is DuPont Analysis. The DuPont Analysis calculates the Return on Equity of a firm and uses profit margin, asset turnover ratio, and financial leverage to calculate RoE.

RoE = Profit Margin x Asset Turnover x Financial Leverage

For example for BPCL, If profit margin = 10% and Financial Leverage is 1.5

Using Formula

• RoE = Profit Margin x Asset Turnover x Financial Leverage
• RoE= 0.1 x 2.87 x 1.5
• RoE= 0.4305 or 43.05%

Explanation of Asset Turnover Ratio Formula

Asset Turnover Ratio is a measure that is used to determine how efficiently a company is generating revenues from its assets. Hence a higher ratio for asset turnover is a good sign that the company is using its assets efficiently. Conversely, if the ratio is lower it indicates that the company is not using its assets efficiently. There are various reasons for which the asset turnover ratio may be lower for a company. Some of the reasons are poor inventory management and collection methods or due to excess production capacity.

Also, another factor to be considered is for companies operating in the same industry, sometimes a company with older assets will have higher asset turnover ratios since the accumulated depreciation would be more. Hence while comparing asset turnover ratios for companies operating in the same industry this should be one of the factors that need to be taken into consideration.

Significance and Uses

As expected, low margin companies would have higher asset turnover ratios since they have to offset lower profits with higher sales. Similarly, for highly capital-intensive industries such as petrochemicals, utilities, power, etc. the asset turnover ratios will be lower since their assets will be much higher. Hence the comparison of asset turnover ratios between companies is more substantial when it is done between companies that operate in similar industries. It is pointless to compare the asset turnover ratios between a telecommunications company and an IT service company.

Also, another point to be remembered is that it is not sufficient to just compare asset turnover ratios of companies for a single year or couple of years. It is plausible that a company asset turnover ratio for any given year might be higher due to various factors such as selling off assets etc. The asset turnover ratio may in any given period be lower due to a purchase of assets.

Asset Turnover Ratio Calculator

You can use the following Asset Turnover Ratio Calculator

Asset Turnover Ratio Formula in Excel (With Excel Template)

Here we will do the same example of the Asset Turnover Ratio formula in Excel. It is very easy and simple. You need to provide the two inputs i.e Net Sales and Average Total Assets

You can easily calculate the Asset Turnover Ratio using Formula in the template provided.

First, we calculate Average Total Assets

Then, we calculate the Asset Turnover Ratio Using Formula

Conclusion

Asset turnover ratio is an efficiency ratio that measures how a company effectively uses its assets to generate sales. As with all ratios, this ratio should also be used while comparing companies across similar industries. A higher asset turnover ratio indicates that a company is using its assets effectively while a lower ratio indicates that the company is not using its assets efficiently. Asset turnover ratio is also used in DuPont analysis to calculate the Return on Equity of a company.

Also while comparing asset turnover ratios, one needs to look at the performance of the companies over the last few years rather than in a single year. This is because sometimes the asset turnover ratio of any company might be inflated or deflated due to some factors such as selling off assets or large asset purchases during any given period.

Recommended Articles

This has been a guide to an Asset Turnover Ratio formula. Here we discuss its uses along with practical examples. We also provide you with the Calculator with a downloadable excel template. You may also look at the following articles to learn more –

1. Calculator of Marginal Cost Formula
2. Calculation of Weighted Average Formula
3. Examples of Stock Turnover Ratio
4. Quick Glance of Asset Turnover Ratio