| Asset turnover ratio is a key performance indicator (KPI) that shows how efficiently a company is using its owned resources to generate revenue or sales. The ratio compares the company's gross revenue to the average total number of assets. The asset turnover ratio is typically used by third parties -- such as investors and creditors -- to evaluate the efficiency of a business's operations. By comparing companies in similar market segments, investors and creditors can discover which companies are getting the most out of their assets and what weaknesses others might be experiencing. In general, the higher the asset turnover ratio, the more efficient the use of the company's assets. It is important to note, however, that the asset turnover ratio will be higher in some sectors than in others. For example, retail organizations generally have smaller asset bases but high sale volumes, which creates high asset turnover ratios. On the other hand, businesses in sectors such as utilities and real estate often have large asset bases, but low sale volumes, which creates much lower asset turnover ratios.
How to calculate the asset turnover ratio Most companies calculate the asset turnover ratio on an annual basis, using balance sheets from the beginning and end of the fiscal year. The ratio can be calculated by dividing gross revenue by the average of total assets. It should look like this: asset turnover ratio = gross revenue / average total assets The average total assets can be found by adding the beginning assets to the ending assets and dividing this sum by two. It should look like this: average total assets = (beginning assets + ending assets) / 2 In this equation, the beginning assets are the total assets documented at the start of the fiscal year, and the ending assets are the total assets documented at the end of the fiscal year.
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