In around two minutes you will know what is Asset Turnover Ratio. You will get both professional definition and easy explanation. No intro, no outro, straight to the point.
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Asset Turnover Ratio is the activity ratio that measures how effectively the management of a company uses its assets to generate revenue.
Some other activity ratios would be inventory turnover ratio, accounts receivable turnover ratio, and fixed assets turnover ratio. And if you are not sure what either of them mean, feel free to watch my other videos.
The formula of asset turnover ratio is extremely simple. You just need to take total revenue and divide it by average total assets. Total revenue can be found on the income statement and total assets are located on the balance sheet.
Let’s say, Company A had $900,000 in assets in the beginning of 2020. By the end of 2020 its assets increased to $1,100,000. Which means that its average total assets equal $900,000 plus $1,100,000, divided by 2, which equals $1 million. And this company was able to produce $1,500,000 in revenue.
When we put all the numbers in our formula, we get the following. $1.5 million divided by $1 million, which equals 1.5. And it means that Company A was able to generate $1.5 from every dollar of assets that it owns.
Investors prefer to see as high asset turnover ratio as possible. Which means that this company is able to maximize the usefulness of its assets and generate more revenue.
But be careful, because every industry has its own acceptable standards of financial health. Companies that sell their goods and restock inventories fast, such as Walmart for example, tend to have higher asset turnover ratios.
That is why you should always compare this ratio between the companies from the same industry.
Additionally, asset turnover ratio is just one of the ratios that investors use when analyzing a company. You should never rely solely on it and include as many fundamentals and other multipliers in your analysis as possible.
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*None of this is meant to be construed as investment advice, it's for entertainment purposes only. Links above include affiliate commission or referrals. I'm part of an affiliate network and I receive compensation from partnering websites. The video is accurate as of the posting date but may not be accurate in the future.
