Asset turnover ratio measures how much revenue the company generates for every Rs 1 of asset of the company.
Formula
Asset Turnover = Total Sales / Average Total Assets
Example
Company ABC makes sales of Rs 100 Cr. The average total asset of the company is Rs 500 Cr. Then the asset turnover ratio is 0.2
For every Rs 1 of asset, the company generates sales of Rs 0.2
How to use practically
It is an indicator of how efficient the company is at using both current and fixed assets to produce revenue.
The asset turnover ratio is a good indicator for measuring the health of a business and how efficient a company is in utilizing its assets to generate revenue.
The higher the ratio, the better the business performance of the company. On the other hand, a lower ratio may indicate a problem with one or more asset categories comprising of total assets – inventory, receivables, or fixed assets.
We have checked the inventory turnover ratio, debtor ratio, and fixed asset ratio to come to conclusion on how the management is able to efficiently manage the total asset of the company.
Management should be prudent in inventory management, working capital cycle, and capital expenditure planning to efficiently use the total asset to generate higher sales.