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Asset Turnover Ratio

Asset Turnover Ratio Assignment / Homework Help
Asset turnover ratio explains the relationship between a company’s assets and its turnover or sales revenue. It measures the company’s efficiency to use its assets to generate revenue. It indicates the amount of sales generated from each dollar of asset. It is computed as:

         Sales        
Average Assets

Sales used to compute the ratio are the net sales as reflected in the company’s profit and loss account. Average assets are the total of assets at the beginning and end of the period divided by 2.

Asset turnover ratio must not be looked at in isolation. It must be compared with the industry standard to assess the company's efficiency in using its assets. A higher number indicates better utilization of assets and better efficiency of the company to employ its assets to generate sales revenue.

Example:

A company has the following turnover and asset numbers taken from its balance sheet.

 Year 2009   Year 2008 
Turnover $2,654,900 $2,086,450
Current assets $1,769,879 $1,567,632
Fixed assets $5,756,423 $1,687,893

Asset turnover ratio:

$2,654,900
$3,390,914

0.78 Or $0.78 of revenue for every $1 in assets

Average assets:
(($1,769,879+$5,756,423) + ($1,567,632 + $1,687,893))/2
$3,390,914


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