Assets Turnover Ratio

Assets Turnover Ratio is a type of Turnover Ratio that determines a company’s return on its assets relative to its net sales. In other words, this ratio tells how good a company is in using assets to generate sales.

Assets Turnover Ratio= Net Sales / Average Assets
Where,
Net Sales = Total Sales During the Period – Returns - Allowances
Average Fixed Assets= Fixed Assets the Beginning of Period + Fixed Assets at the End of Period / 2
  • Note: The Average Assets are calculated after removing the effect of Depreciation.
  • The above formula may be used to calculate Fixed Assets Turnover Ratio or Current Assets Turnover Ratio by replacing Averages Assets in the formula by Average Fixed Assets/Average Current Assets.

Significance and Interpretation

Assets Turnover Ratio tells the number of times the average Assets are sold in a period, it helps companies plan their productions.
  • High Assets Turnover Ratio indicates that a large amount of sales is generated using a small number of assets, which indicates that the company is highly efficient in utilizing its assets.
  • However, Higher Fixed Asset Turnover Ratio may also be high because the company has sold off its assets and outsourced its operations and has maintained the same amount of sales.
  • Low Assets Turnover Ratio indicates that the company is not utilizing its assets efficiently. The company may have invested in a few assets which are not able to generate high sales for the company.
  • It must be noted that while comparing two companies on the grounds of Assets Turnover Ratio, they should be of the same industry.

Examples

Example 1: Use the following data of ABC Ltd, to calculate its Assets Turnover Ratio.
Total Sales during FY = Rs. 1500000.00
Total Return on Sales During FY = 20% of Total Sales
Assets at the Beginning of FY = Rs 300000.00 (adjusted for Depreciation)
Assets at the End of FY = Rs 500000.00 (Adjusted for Depreciation)
Solution:
Net Sales = Total Sales – Returns = Rs. 1200000.00
Average Fixed Assets= Assets at the Beginning of Period + Assets at the End of Period / 2
Average Assets = (500000 + 300000) / 2 = Rs. 400000.00
Assets Turnover Ratio = Total Sales / Average Assets
= 1200000 / 400000 = 3
Hence, Assets Turnover Ratio = 3
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