Asset Turnover Ratio

Asset Turnover Ratio

Formula

$$\text{Asset turnover} = \frac{\text{Net sales revenue}}{\text{Average total assets}}$$

Explanation

• Measures how efficiently the company uses all its assets to generate sales.
• “How many ringgit of sales per RM1 of assets?”

Satisfactory level

• Higher asset turnover = more efficient use of assets.
• A very low turnover may indicate under-utilised assets or too much investment in assets.

Industry norm

• Retailers: usually higher turnover.
• Capital-intensive industries: lower turnover.

Example

• Net sales = RM1,500,000
• Total assets last year = RM900,000; this year = RM1,100,000
• Average assets = (900,000 + 1,100,000) ÷ 2 = RM1,000,000

$$\text{Asset turnover} = \frac{1,500,000}{1,000,000} = 1.5 \text{ times}$$

Each RM1 of assets generates RM1.50 of sales.