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Bank Promotion Exams |
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Asset Turnover Ratio or Total Asset Turnover Ratio The asset turnover ratio is an efficiency ratio that measures a company's ability to generate sales from its assets by comparing net sales with average total assets. In other words, this ratio shows how efficiently a company can use its assets to generate sales. The total asset turnover ratio calculates net sales as a percentage of assets to show how many sales are generated from each dollar of company assets. For instance, a ratio of .5 means that each dollar of assets generates 50 cents of sales. The asset turnover ratio is calculated by dividing net sales by average total assets. Formula Asset Turnover Ratio or Total Asset Turnover Ratio = Net Sales / Average Total Assets Example Seela's Tech Company is a tech start up company that manufactures a new tablet computer. Seela is currently looking for new investors and has a meeting with an angel investor. The investor wants to know how well Seela uses her assets to produce sales, so he asks for her financial statements. Here is what the financial statements reported: Beginning Assets: 50,000 The total asset turnover ratio is ...... Asset Turnover Ratio or Total Asset Turnover Ratio = Net Sales / Average Total Assets = 25000 / ((50000+100000)/2) As you can see, Seela's ratio is only 0.33. This means that for every Rupee in assets, Sally only generates 33 Paisa. In other words, Seela's start up is not very efficient with its use of assets. ................................. |