Total asset turnover

Why is total asset turnover important?

Total asset turnover is a crucial indicator of how well a company is managing its assets to produce sales. A higher ratio suggests that the company is using its assets efficiently, while a lower ratio may indicate underutilized assets or inefficiencies in managing resources. A company's asset turnover ratio is particularly important for comparing companies within the same industry or sector to see which are operating more efficiently.

Total asset turnover formula

The formula to calculate total asset turnover is simple yet powerful in assessing operational efficiency:

Total asset turnover = net sales / average total assets

• Net sales refers to the revenue generated from business operations gross sales after deducting returns, allowances, and discounts.
• Average total assets is calculated by taking the sum of the assets at the beginning and the end of the period and dividing by two.

This formula helps you understand how many dollars in sales are generated for every dollar invested in assets.

How to calculate total asset turnover

Calculating total asset turnover can be calculated in three easy steps:

1. Determine net sales: Start with the total revenue generated from sales activities and subtract any returns or discounts to arrive at the net sales figure for the fiscal period.
2. Calculate average total assets: Add the total assets recorded at the beginning of the period to the total assets at the end of the period, then divide by two. This gives the average total assets for the period.
3. Use the total asset turnover formula: Divide net sales by average total assets to find the total asset turnover ratio.

Example of calculating total asset turnover

Suppose a company has net sales of $60,000. The total assets at the beginning of the year were $50,000, and at the end of the year, they were $70,000. The average total assets would be:

Average total assets = ($50,000 + $70,000) / 2 = $60,000

Using the total asset turnover formula:

Total asset turnover = $60,000 / $60,000 = 1

This calculation shows that for every dollar invested in assets, the company generated one dollar in sales, indicating how efficiently the company's assets are being utilized to produce revenue.

Is your company efficiently using assets to generate sales?

If you're a business owner, the total asset turnover can give you a snapshot of the operational effectiveness of your company. By applying this ratio, you can pinpoint operational strengths and areas for improvement to enhance productivity and profitability.

FAQs

What does a high total asset turnover ratio indicate?

A high total asset turnover ratio shows that a company is efficiently using its assets to generate sales.

Can total asset turnover vary by industry?

Yes, total asset turnover ratios can vary significantly across different industries due to varying business models and levels of fixed assets. To isolate for that, sometimes a fixed asset turnover ratio is used. Total asset turnover is most useful when comparing companies within the same industry.

How often should total asset turnover be calculated?

Total asset turnover should be calculated regularly, typically at the end of each fiscal year, to assess and show a good asset turnover ratio and compare the operational efficiency over time or against industry peers.

How does LegalZoom help with total asset turnover?

LegalZoom offers services to help you with business operational efficiency. For example, Books, our online bookkeeping tool, can be useful in helping business owners get a better understanding of cash flow. That's important to know if you're deciding whether to purchase additional assets, such as equipment, to expand your business. Our tax experts can also advise small business owners about the tax implications of purchasing fixed assets.