Asset Turnover measures the company’s efficiency, productivity at using its assets in generating sales or revenue. Sometimes this ratio is referred as efficiency ratio, asset utilization ratio or asset management ratio.
Every company had assets of some sort, even it’s a home based business or an international conglomerate, and every company produces goods and services for sale to a consumer market. The asset turnover can be very helpful in measuring progress in each and every area.
Asset Turnover indicates the relationship between the net assets employed and the revenue it yields. This ratio is useful to determine the amount of sales that are generated from each penny of assets. Therefore this ratio is much useful for the growth of the companies to check whether their growing revenue is proportion to sales. A company should have a proper balance maintained between debt and equity. It indicates a pricing strategy as companies with low profit margins tend to have high asset turnover and those with high profit margins have low asset turnover.
High ration is considered desirable for the company, it indicates the company operating performance. A higher asset turnover ratio represents greater shareholder wealth. A low asset ration means inefficient utilization of fixed assets. Revenue value can be taken from the company’s income statement and the net assets from the balance sheet.
Asset Turnover = Revenue
Net assets
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