What asset turnover tells you
Asset turnover links the income statement to the balance sheet. Revenue is what the business earned from sales over the period, after returns and discounts. Total assets are everything it owns and uses to produce those sales: cash, receivables, inventory, equipment, buildings and intangible assets such as purchased software.
A result of 2.00 means the business generated 2 of revenue for every 1 of assets it held on average during the period. A result of 0.50 means it needed 2 of assets to produce each 1 of revenue.
Reading a high or low result
What is normal depends mostly on the business model. A business that needs plant, vehicles or networks to operate carries far more assets for each unit of sales than one that buys and resells goods or sells services, so its turnover is usually lower.
- A rising ratio can mean the business is selling more from the same assets. It can also mean assets were sold or written down, so check which before reading it as an improvement.
- A falling ratio can mean sales slowed or assets are sitting idle. It may also follow a recent investment in new capacity that has not yet produced revenue.
- A high ratio can partly reflect old, heavily depreciated assets carried at a low book value, rather than more efficient use.
Compare the ratio with the same business over several periods, or with similar businesses.
What the ratio does not show
- It says nothing about profit. A business can turn its assets over quickly at thin margins and still earn little.
- Assets are mostly recorded at historical cost less depreciation, so two businesses using similar equipment can report very different totals depending on its age.
- Some resources the business relies on are not recorded as assets at all, such as a brand it built itself, so they do not appear in the ratio.
Average vs ending balances
Revenue builds up over the whole period, while total assets are measured on a single date. Averaging the opening and closing totals gives a better match with a full period of sales, especially when the business bought or sold large assets during the year. To use the average, open “Add opening balances to use averages” and enter total assets at the start of the period. If you leave it blank, the calculator divides by ending total assets instead. The two give different answers whenever total assets changed, so use the same method each time you compare.
Common mistakes
- Using gross sales instead of net revenue. Returns, allowances and discounts should come out first.
- Comparing a quarterly result with annual ones. A quarter’s revenue is far smaller than a year’s while the assets stay much the same, so the ratio drops.
- Comparing businesses with very different asset needs and reading the gap as a difference in management.
- Using an average in one period and an ending balance in another.
Related measures
Return on assets divides net income by the same average total assets, so it shows profit rather than sales for each unit of assets. In a DuPont analysis, asset turnover is the efficiency factor that, with net profit margin and the equity multiplier, makes up return on equity. Inventory turnover narrows the focus to a single asset: the stock a business holds for sale.