Asset Turnover
Financial Statement Analysis and Asset Turnover
| The asset turnover financial ratio measures the amount of sales generated from each dollar of assets. |
Analysts use asset turnover to measure how efficiently the company used its assets to generate revenue. The higher the ratio, the more efficiently management has used company assets to generate revenue. Like most financial ratios, asset turnover is most relevant when compared to competitors, industry ratios, and company trends.
Calculating the Asset Turnover Financial Ratio
| Total Revenue/Average Assets for Period |
| where Average Assets for Period = (Beginning Assets + Ending Assets)/2 |
For example, Sunny Sunglasses Shop had total assets at year end of $101,008. Because the business started on January 1, 2010, there is no beginning asset balance.
Total sales for the year are $144,000.
Asset Turnover Example
| Average Assets for Period = (0 + 101,008))/2 = 50,504. |
| 144,000/50,504 = 2.85 |
Sunny’s asset turnover equals $2.85.
The next step, as always when calculating any financial ratio, is to add meaning to this number by comparing it with the industry averages:
Financial Statement Analysis
Industry Ratios: Asset Turnover
| Company | Asset Turnover |
| Sunny Sunglasses Shop | 2.8 |
| Specialty Retail, Other | 1.5 |
| Sunglasses Hut Int. (Luxottica Group) | .7 |
| S&P 500 | .8 |
Sunny Sunglasses Shop is earning $2.80 of gross sales for every $1 invested in assets, compared to $1.50 for the Specialty Retail Industry, and $.70 for its closest competitor, Luxottica.
Industries with lower asset turnover ratios tend to have higher profit margins since more assets are required to generate revenue, which in turn creates a barrier to entry and less competition. Less competition gives companies more leeway to raise prices.
Conversely, companies with higher asset turnover tend to have fewer assets required to generate revenue, and consequently, fewer barriers to entry. This leads to more competitive pricing and lower profit margins.
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