How to Find and Calculate Total Asset Turnover

The total asset turnover ratio is a financial metric that reveals how efficiently a company uses its assets to generate sales revenue. This ratio helps stakeholders understand a company’s operational effectiveness in converting its asset base into revenue.

Identifying the Required Financial Data

Calculating the total asset turnover ratio requires two specific pieces of financial information: net sales and average total assets. Net sales represent the total revenue a company generates from its sales activities, after accounting for any returns, allowances, or discounts. This figure provides a true measure of the revenue derived directly from customer purchases. You can typically locate net sales at or near the top of a company’s Income Statement, which details a company’s revenues and expenses over a specific period, such as a quarter or a year.

Average total assets account for the value of all resources a company owns, including tangible items like property and equipment, and intangible items. The “average” is used because a company’s asset levels can fluctuate throughout the year due to purchases, sales, or depreciation. To calculate average total assets, you will need total asset figures from two consecutive Balance Sheets, typically the end of the current and previous year. The Balance Sheet presents a snapshot of a company’s assets, liabilities, and equity at a specific point in time. The average total assets are calculated by adding the beginning total assets to the ending total assets and then dividing the sum by two.

Calculating the Ratio

After identifying the necessary financial data, apply these figures to the total asset turnover formula. The formula is straightforward: Net Sales divided by Average Total Assets. This calculation converts the financial numbers into a meaningful ratio.

To illustrate, consider a company with net sales of $1,500,000 for the year and average total assets of $750,000. To calculate the ratio, divide $1,500,000 by $750,000. The result is 2.0. This outcome is typically expressed as “2.0x” or “2.0 times,” signifying that the company generates $2.00 in sales for every $1.00 of assets it holds.

Interpreting the Result

Interpreting the total asset turnover ratio requires context to gain meaningful insights into a company’s performance. A higher ratio generally suggests a company is more efficient in utilizing its assets to generate sales. Conversely, a lower ratio might indicate a company is not using its assets as effectively, potentially due to excess capacity or underperforming assets.

The interpretation of this ratio is highly dependent on comparing it against relevant benchmarks. Industry benchmarks are important because what constitutes a “good” ratio varies significantly across different sectors. For instance, a retail company might have a much higher asset turnover ratio due to its fast inventory cycles and lower capital investment per sale, compared to a manufacturing company that requires substantial investment in machinery and facilities. Comparing the ratio solely between companies in different industries would not provide an accurate assessment of efficiency.

Analyzing a company’s historical performance provides insights into trends in asset efficiency. Observing whether the ratio has increased or decreased over time can reveal improvements or declines in how management converts assets into sales. Comparing the ratio to competitors within the same industry allows for an assessment of relative efficiency. While the total asset turnover ratio is a useful indicator, it represents just one component of a comprehensive financial analysis and should be considered alongside other financial metrics for a complete picture of a company’s health and performance.