What is Asset Turnover Ratio?
Asset Turnover Ratio is a vital determinant of performance of any company and is basically the ratio of company’s sales or revenues and the value of its assets. It is used to gauge the efficiency of use of a company’s assets in the generation of revenue. Higher ratios are a symbol of good health as it shows that company is generating more revenue. It is usually calculated annually for a specific financial year.
It is thus calculated by taking average assets of a company at the starting of the year and at the end of the financial year while putting the total number of assets in the denominator.
Asset Turnover Ratio= Net Sales Value/Average of Total Assets
A low asset turnover ratio is a symbol of surplus in production capacity, poorly kept inventory and improper tax collection methods. Industries with low margins have high asset turnover ratio.