Total Asset Turnover Ratio, Formula

Total Assets Turnover Ratio compares revenues generated by the business with the value of total assets.

Total asset turnover

The following formula is used to calculate this ratio:

Total Asset Turnover = Net Sales or Revenues / Average Value of Total Assets

Total asset turnover formula

Net Sales (or Revenues): This is the revenue from all sales of goods and services, minus returns, allowances for damaged or missing goods, and any discounts allowed

asset turnover ratio

Average Total Assets: This is the average value of all a company’s assets, calculated by adding the beginning and ending total asset balances for a period (usually a year) and dividing by two

asset turnover formula

Taking average value of assets into the calculation better represents the value of assets in the business, since it can fluctuate through the period depending on seasonality or other factors. Also this is logical comparison, since average value of assets is then compared to net sales, which represent level of sales through all the period in question.

This ratio indicates what is the level of revenue the business generates using the assets on hand. This is an indicator of efficiency showing, how efficient is the business in using its assets.

Total asset turnover ratio

A higher ratio indicates that the company is using its assets more efficiently to generate sales. Conversely, a lower ratio might suggest that a company is not using its assets effectively.

Total Assets Turnover Ratio – calculation example

For example:

net sales of the company are $200,000
average total assets of this company are $100,000

Total Asset Turnover = $200,000 / $100,000 = 2

This means that for every dollar of assets owned by the company, it generates $2 of sales.

Total asset turnover ratio

This ratio as a stand alone is not indicative and it should be either compared across various periods of time in the same business or with the competitors operating in the same industry area.

Total Asset Turnover Ratio is important for comparing the performance of companies in capital-intensive sectors, like manufacturing, where investments in assets are significant. However, it’s less useful for comparing companies across different industries, as asset utilization can vary widely depending on the nature of the business.