Asset Turnover

Asset turnover ratio is a particular ratio which provides information about ability of the organization to be more efficient in a particular way wherein, it would generate higher level of sales in the area of its working. This ratio helps in ensuring that, relationship with COGS or sales is being developed in a proper and appropriate way. It provides an idea regarding the way in which the organization is being managing its assets in a proper and appropriate way at a particular point.

Asset turnover ratio is being determined by way of dividing total average assets with net sales of the organization. Beginning and ending balances of assets are being taken into consideration in the course of asset turnover ratio being taken into consideration. If asset turnover ratio is at a higher level then, it would mean that, organization is being effectively utilizing its assets. Lower ratio would identify lower utilization of the organizational assets.

Formula

Net sales / Total actual assets of the organization

Fixed asset turnover ratio is to identify whether the organization is being using its fixed assets in a proper way within the organization or not. This ratio is crucial for the organization as a result of the fact that, sales are being generated by way of investment in fixed assets of the organization also. If there is low ratio then, it would mean that the organization is not being utilizing its assets in a proper and appropriate way.

The formula is Net sales / net Fixed Assets

Net Fixed Assets means the total of all fixed assets of the organization being taken into consideration at the present point. The formula which is being used for identifying net fixed assets is the formula in the name of Net Fixed Assets = Fixed Asset Purchase Price + Subsequent Additions to Existing Assets - Accumulated  Depreciation - Liabilities Associated with the Fixed Assets.

The intangible assets are being excluded from the definition of net fixed assets of the organization. If the organization has higher fixed assets then, it is going to be a scenario that, proper investment decisions are being made by the organization at a particular point. If the organization has lower value then, it would require ensuring that, it enhances the value to a certain extent.

Current asset turnover ratio: This is a particular ratio wherein, relationship between net sales and current assets of the organization is being identified. This ratio is considered to be beneficial for the organization which is being into manufacturing business. The current asset turnover ratio is calculated by dividing net sales by current assets of the organization.

How do you find the total asset turnover ratio?

Following example of Total Assets Turnover Ratio illustrates how to find total asset turnover ratio:-

From the given “Statement of Financial Position”/“Balance Sheet” of Kevin Guitar Manufacturing Company, Calculate Turnover for different types of Assets. Sales for the year amounted to $800,000

Balance Sheet as at December 31, 2015

Here, M.V. Refers to Market Value.

References

Garner, T. (2009). Asset Turnover Ratio. Routledge.

George, R.C. (2012). Accountings Ratios and Importance. Cengage Learning.

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