To understand any financial ratios in-depth, trend analysis has to be performed. This is because the key revenue-driving factor would be something else like Human Capital, etc which are not appearing on the Balance Sheet.At times evaluating companies solely through asset turnover ratio would be inappropriate.On the other hand, a lower asset turnover ratio indicates that the company is inefficient in managing its assets.Generally, a high asset turnover ratio indicates that the company is more efficient since it is able to generate more revenue with given assets.As we have already understood, the Asset turnover ratio indicates if the company is efficient in using its assets.We can even perform trend analysis to see how the ratio has moved historically. Hence, we need to compare the ratio with other companies in the same industry. On a standalone basis, the asset turnover ratio of 2.4 times may not give a clear picture. Hence, efficient management of overall assets can be seen in the case of Walmart. This indicates that the company is able to generate revenue which 2.4 times the value of overall assets. Now that we have all the values, let us calculate the turnover ratio for Walmart.Īsset turnover ratio = Net sales / Average total assetsĪs evident, Walmart asset turnover ratio is 2.5 times which is more than 1. Let us calculate Average total assets for Walmart Now, take a look at Walmart’s consolidated Balance Sheet. The Sales value given in the income statement is after reducing sales returns, if any. In the case of Walmart, Net Sales can be easily calculated from the income statement. In our next example, let us calculate the turnover ratio for using excel.ĭownload the asset turnover ratio template using the below option.īelow shown is the Consolidated Income Statement of Walmart. Nonetheless, Company B is relatively more efficient in utilizing its assets to generate revenue when compared to Company A. They are unable to generate revenue which is at least equal to their asset base. What this means is that companies are not managing their overall assets efficiently. Hence, the ratio for both companies is below 1 times. Now that we know all the values, let us calculate the ratio for both the companies.Īsset turnover ratio = Net Sales / Average total assets Hence the same can be used as Average total assets In the given example, we have total assets for only one period. Let us calculate Average total assets for both the companies. Now, consider the below-given Balance Sheet for both the companies. Let us calculate Net sales for both the companies Values given in the examples below are in $ millions.Ĭonsider the below-given income statement for both the companies. We take Company A and Company B for calculating the ratio. Let us understand the assets turnover ratio with a hypothetical example. Further, an average of such total assets has to be considered and not mere closing total assets.Total assets should include both current and non-current assets.Hence, sales value should be net of any taxes.Sales value should not include any tax amount collected from customers.Hence, Net sales have to be considered.Any goods returned from the customers (Sales Return) have to be reduced.We need to consider both, cash sales and credit sales as part of the numerator.Any unrelated income (such as interest income on deposits with banks) should not be included in the numerator.Sales refer to normal revenue that the company generates from its core operation.We take a simple average of total assets as at the current period-end and previous period-end.īelow aspects has to be kept in mind while calculating the numerator and denominator. The Average total asset can be calculated from the company’s balance sheet. It is nothing but the revenue company generates after reducing sales returns, if any. Net Sales can be easily obtained from the company’s income statement. We take Net Sales in the numerator and Average total asset in the denominator. Asset turnover ratio formulaĪs seen in the image above the formula for the total asset turnover ratio is quite intuitive. This helps in determining if the company is asset-heavy or asset-light. It indicates how much revenue is the company making from each dollar of assets. The asset turnover ratio tries to build a relationship between the company’s revenue and the company’s overall assets. The total asset turnover ratio is yet another important activity ratio that measures the efficiency of the company in utilizing the assets as part of its operations.
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