Investors and business-owners use these tools to judge the strengths of companies as well as the areas where they may be lacking. Financial ratios take statistics gained from income reports and balance sheets and make ratios which are useful for comparing similar companies to each other. One of the ways in which companies are judged in terms of efficiency of turning assets into sales is through the net asset turnover ratio. If you see your company’s asset turnover ratio declining over time but your revenue is consistent or even increasing, it could be a sign that you’ve “overinvested” in assets.

And such ratios should be viewed as indicators of internal or competitive advantages (e.g., management asset management) rather than being interpreted at face value without further inquiry. So from the calculation, it is seen that the asset turnover ratio of Nestle is less than 1. We have discussed how you would be able to calculate the asset turnover ratio and would also be able to compare among multiple ratios in the same industry. Also, many other factors can affect a company’s asset turnover ratio during periods shorter than a year. Sales of $994,000 divided by average total assets of $1,894,000 comes to 52.5%. A low asset turnover ratio indicates inefficiency, or high capital-intensive nature of the business. This shows that company X is more efficient in its use of assets to produce revenue.

Example of the Total Asset Turnover Ratio

There are industry standards that the ratio depends on with some companies utilizing their assets efficiently while others don’t. For instance, in the retail industry companies have small total assets and high sales volume which means that their asset turnover ratio is likely to be high. The asset turnover ratio is a widely used efficiency ratio that analyzes a company’s capability of generating sales.

RestructuringRestructuring is defined as actions an organization takes when facing difficulties due to wrong management decisions or changes in demographic conditions. If the ratio is less than 1, then it’s not good for the company as the total assets cannot produce enough revenue at the end of the year. Therefore, for every dollar in total assets, Company A generated $1.5565 in sales.

Comparisons of Ratios

First, it assumes that additional sales are good, when in reality the true measure of performance is the ability to generate a profit from sales. Second, the ratio is only useful in the more capital-intensive industries, usually involving the production of goods. A services industry typically has a far smaller asset base, which makes the ratio less relevant. Third, a company may have chosen to outsource its production facilities, in which case it has a much lower asset base than its competitors. This can result in a much higher turnover level, even if the company is no more profitable than its competitors. And finally, the denominator includes accumulated depreciation, which varies based on a company’s policy regarding the use of accelerated depreciation.

• The total asset turnover ratio should be interpreted in conjunction with the working capital turnover ratio.
• Consider a company, Company A, with a gross revenue of $20 billion at the end of its fiscal year.
• Clearly, it would not make sense to compare the asset turnover ratios for Walmart and AT&T, since they operate in very different industries.
• Figure out how effectively a company is using its assets to create revenue.
• It accomplishes this by comparing the average total assets to the net sales of a company.