What is asset turnover?

Asset turnover is a measure of the use of assets in a business. It's used to determine how efficiently a company uses its assets, and to measure the financial performance of a business.

How is asset turnover calculated?

Asset turnover is calculated by dividing the net sales by the average total assets. The formula is:

Asset Turnover

=

Net Sales  ÷

Average Total Assets

Example of asset turnover

Let's review an example of asset turnover in use. Suppose company A has \$10 million in annual sales and \$10 million worth of assets; its asset turnover is 1.0 (\$10M/\$10M). On the other hand, company B has \$100 million in annual sales and \$20 million worth of assets, so its asset turnover is 5 (\$100M/\$20M). These asset turnover numbers are sometimes referred to as asset turnover ratios or asset turns.

Is having a low or high asset turnover better?

The higher the asset turnover, the better. This means you are getting more from each dollar invested in your business.

For example, a high asset turnover tells investors (and your finance team) you're using your money well. If you have an asset turnover ratio of 2x, it means that for every \$1 spent on assets (like machinery and equipment), they got \$2 worth of sales revenue back in return. That's great news for investors because it means they're getting twice as much back from when they invested in the company than if they'd put their money into another company with a lower ATR (asset turnover ratio).

What are the benefits of tracking asset turnover?

If you run a manufacturing facility, for example, having a low asset turnover will give you a good indication that your assets (like equipment) and liabilities (like loans) are not where they need to be to break even (or profit) in terms of sales. This information can help the team make key changes to get back on track, like increasing production volume to meet financial goals.

Some tips to improve asset turnover

Here are a few tips to follow to improve your overall asset turnover:

• Track the number of assets you have. This will help you determine how many assets are being used and how many are in maintenance, repair, or disposal.
• Keep track of your asset turnover ratio so that if it's low, you can work on improving it by selling off unused equipment and increasing the amount of money spent on maintaining what remains.