What Is A Good Asset Turnover Ratio & Why It Is Important
What Is An Asset Turnover Ratio
Asset turnover ratio is a financial metric that indicates the efficiency of a company to generate sales by using its assets. This ratio shows the company’s performance in utilizing its economic resources to generate revenue.
A higher asset turnover ratio indicates the best performance and utilization of assets to generate sales while a lower asset turnover ratio shows bad performance and low sales.
How To Calculate Asset Turnover Ratio?
Asset Turnover Ratio: Net Sales/Average Total Assets
For net sales, you will be needed the statement of profit and loss. Net sales are the total sales of the company for a fiscal year less sales returns, allowance, and discounts.
| Total Sales | $50,000 |
| Sales return | $1,000 |
| Allowance | $500 |
| Discount for the period | $1,500 |
The net sales will be $47,000.
For average total assets, you will need the statement of financial position. Add the value of assets at the start and at the end of a fiscal year and divide it by 2, you will get the average total assets.
| Albert Corporation’s total assets at the start of 2023 | $100,000 |
| Albert Corporation’s total assets at the end of 2023 | $150,000 |
You will get an average total assets of $125,000.
We have a value of net sales and average total assets as well. Let’s calculate the asset turnover ratio.
(47,000/125,000) 0.376%.
What Is A Good Asset Turnover Ratio
A good asset turnover ratio depends on the size of a business, industry, model, and its presence in the market.
A higher asset turnover ratio shows a high profit and performance while a lower asset turnover ratio indicates low profit or sometimes loss.
Industry such as retail has always a higher asset turnover ratio because of a high volume of sales and minimum requirement for assets while industry such as manufacturing needs more fixed assets to make the finished goods which results in low sales or low asset turnover ratio.
Why Asset Turnover Ratio Is Important In A Business
There are various reasons why the asset turnover ratio is important for all businesses. The following are the major reasons:
- This ratio shows how a business uses its resources to make money
- This ratio helps a business to compare itself to its competitors
- A goods asset turnover ratio attracts investors and lenders for financing
- This ratio enables a company to manage and use its assets effectively for the best results
- The asset turnover ratio is important when analyzing the profitability of a business
- Asset turnover ratio provides valuable information for making financial decisions and planning, etc.
FAQs
What is a good asset turnover ratio for banks?
If the ratio is more than 1 then it is always considered a good ratio but for the banking industry, it can be high or low as well because the utilization of long-term assets in banks is relatively high which reduces the asset turnover ratio.
What is a good total asset turnover ratio?
For retail industries asset turnover ratio is normally above 2 because of high sales volume and lower utilization of assets while the manufacturing industries use advanced technology and other long-term assets which reduce its asset turnover ratio which is normally 1 or sometimes less than 1.
What is a good fixed asset turnover ratio?
The high fixed asset turnover ratio is good because its shows how a company uses its fixed assets to drive sales. The higher the fixed asset turnover ratio the more effective investments will be in fixed assets.
What is considered a good asset turnover ratio?
More than 1 is normally considered a fair asset turnover ratio.
What is a good asset turnover ratio for the automotive industry?
3% to 4% return on assets is normally considered good in the automotive industry. If the ratio is more than 1, it is good for the automotive industry.
What does a good asset turnover ratio mean?
A good asset turnover ratio means the business is using its assets effectively which brings more sales and more profit for the owners.
What kind of ratio is asset turnover?
It is a financial metric that evaluates the performance and utilization of assets by a business to drive sales.
What is a good asset turnover ratio for the oil and gas industry?
The ratio between 1 to 1.5 is an idle asset turnover ratio for the oil and gas industry.