An Expansive Overview Of Asset Turnover Ratio

It’s no secret that accounting comes with many important concepts that students need to master. Since your goal is to achieve good grades in accounting, you can't neglect the important topics. One such vital topic is the asset turnover ratio. The complete knowledge of this concept will help you earn good grades and assist you if you decide to pursue a career in accounting.

Understanding asset turnover ratio is undoubtedly tricky. That’s the reason we have prepared this elaborate guide to help you decipher this concept easily. Let’s ponder over it.

What is the asset turnover ratio?

The asset turnover ratio determines the value of an organisation's sales or revenues in comparison with the value of its assets. It can be used as a parameter of the efficiency with which the organisation is utilising its assets to generate revenue.

The higher the asset turnover ratio of the company, the more efficient it is at generating revenue from its assets. Conversely, if a business has a low asset turnover ratio, it highlights that it’s not using its assets effectively to generate sales.

Asset turnover is one of the prominent concepts that you have to learn when studying accounting. This means you need to remember the asset turnover ratio formula. But in case you fumble while working on this topic, MyAssignmenthelp.com will be there to assist you.

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Asset turnover formula

The asset turnover ratio can be determined by figuring out the average of the assets owned by an organisation at the beginning and end of a financial year. You need to keep the total number of assets as the denominator. The ratio can be higher for businesses in some sectors than others. For instance, the retail sector yields the highest asset turnover ratio. 

Simply put, the asset turnover ratio is determined by dividing net sales by average total assets.

Essentially, a low asset turnover ratio indicates issues like poor inventory management and bad tax collection methods.

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What is the total asset turnover ratio?

The total asset turnover ratio draws a comparison with the sales of a company to its asset base. The ratio monitors the ability of a business to efficiently carry out sales and is typically used by third parties to assess the operations of a company.

A company with a high total asset turnover ratio can function with fewer assets than a less efficient competitor. This means the business requires less debt and equity to operate. The outcome should be a comparatively greater return to its shareholders.

It’s essential to note that the total asset turnover ratio can differ widely depending on the specific industries. For example, XYZ company has gained £500,000 in net sales and has £2,000,000 in total assets. You can apply the total asset turnover formula to find out how they’re able to garner revenue from assets:

500,000 / 2,000,000 = 0.25 x 100 = 25%

This indicates that that XYZ company’s assets generate 25% of net sales, relative to their value. In simpler terms, every £1 in assets generates 25 cents in net sales revenue.

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Total asset turnover formula

Calculating the total asset turnover ratio is relatively simple. Here’s the asset turnover ratio formula that you can apply in your calculations:

Total Asset Turnover = Net Sales / Total Assets

Now, it’s crucial to remember that the total asset turnover formula depends on you knowing the figures of total assets and net sales. Just to provide a quick lowdown, presented below are the formulas you can apply to work out these two vital pieces of information:

Total Assets = Liabilities + Owner’s Equity

Net Sales = Gross Sales – Returns – Discounts – Allowances

The total asset turnover ratio shows that the organisation is productive and generate little waste. It also highlights that your assets are still valuable and don’t have to be replaced. A lower asset turnover ratio highlights that an organisation hasn’t been using its assets wisely to generate optimum revenue.

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What is fixed asset turnover?

Fixed asset turnover is an efficiency ratio that highlights how well or optimally a business utilises its fixed assets to ensure more sales. This ratio requires you to divide net sales by net fixed assets, calculated over an annual period.

Generally, a higher fixed asset ratio points to more effective utilisation of investments in fixed assets to garner revenue. This ratio is often evaluated alongside profitability and leverage ratios.

The fixed asset turnover ratio of a company is sometimes low as compared to its competitors. This indicates that sales are low or the investment in plant or equipment is too high. It may not be much of a serious problem if the organisation invests in a fixed asset to modernise its operations.

For instance, a company has annual gross sales of $10M in the year 2018, with allowances and sales returns of $10,000. Its net fixed assets’ initial balance was $1M, while the year-end balance amounts to $1.1M.

Depending on the given figures, the fixed asset turnover ratio for the year is 9.51. This means that for every one dollar that the company invested in fixed assets, a return of almost ten dollars is earned.  The average net fixed asset is determined by adding the beginning and ending balances, then dividing that number by 2.

Endnote,

Achieving good grades on an accounting assignment with the topic of asset turnover ratio may not seem the easiest to deal with. But once you develop a clear understanding, you can produce flawless assignments in class.

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