Asset turnover is a key figure for evaluating the efficiency with which a company uses its assets to generate income. Here we show you what asset turnover actually means, how it is calculated and what it indicates.
What is asset turnover?
Asset turnover measures the value of a company's revenues in relation to the value of its assets. It is also referred to as the asset turnover ratio. This ratio shows the efficiency with which a company uses its assets to generate income.
The higher the asset turnover, the better a company uses its assets to generate revenue. If asset turnover is low, on the other hand, this indicates that efficiency is less good.
Asset turnover vs. return on assets
Asset turnover should not be confused with return on assets. The return on assets indicates how high the profit is that is achieved from the invested assets, i.e. what remains after deducting the costs from the income.
How do you calculate asset turnover?
Total asset turnover formula
To calculate the asset turnover, there is a simple formula in which the total sales revenue is compared to the assets employed:
Total asset turnover = Total annual sales / ((Total assets at start of year + Total assets at end of year) / 2)
This formula therefore shows how high the asset turnover is in a business year. The assets at the beginning and end of the year are shown on the balance sheet. They include both tangible and intangible assets and current assets.
By adding the two asset values and then dividing by 2, you get the average value of the assets over the course of the year. This is then compared to the total annual sales or revenue, which can be found on the income statement.
Fixed asset turnover formula
In addition to total asset turnover, fixed asset turnover can also be calculated. In this case, only the fixed assets are compared to the total sales. Fixed assets include all non- current assets and tangible long-term assets, for example:
- Land
- Real estate
- Machines
- Vehicles
- Equipment
- Furniture
The formula can then be set up in exactly the same way as that for total asset turnover:Fixed asset turnover = Total annual sales / ((Fixed assets at start of year + Fixed assets at end of year) / 2)
ExampleA company shows the following items on its balance sheet and income statement:
- Total annual sales: £200,000
- Assets at start of year: £150,000
- Assets at end of year: £120,000
If we now put these values into the formula, we get:
Asset turnover = £200,000 / ((£150,000 + £120,000) / 2) = £200,000 / £135,000 ≈ 1.5
What does an asset turnover of 1.5 mean?
The asset turnover in the example above is therefore about 1.5. This means that the value of the assets used is lower than the income generated from them, which speaks for high efficiency. The company therefore uses its assets very efficiently to generate income.Interpretation of asset turnover ratio
As we can see from the example above, asset turnover ratio with a value greater than 1 stands for high efficiency, because the value of the revenue is higher than the value of the assets used.
On the other hand, a value of less than 1 indicates that the assets are being used inefficiently, as in this case the asset value is higher than the income generated.
What is a good asset turnover?
Asset turnover varies greatly from sector to sector, so it is not possible to derive a general value. In general, the higher the asset turnover, the better.
To assess whether your company's asset turnover is high or low, you should only ever compare yourself with companies from the same industry. Then you can assess how your asset turnover compares to the competition.
If it is significantly lower than the asset turnovers of your competitors, this indicates that there is potential for optimisation in your company and that your assets are not yet being used efficiently enough.
