# Asset Turnover Ratio

Efficiency is the ability of a business to perform effectively and utilize its assets to generate revenue, and is indicated in the financial projections template by the asset turnover ratio. The ratio is an indicator of how well a business can generate revenue (and therefore profits) from its asset base.

## Asset Turnover Ratio Formula

The asset turnover ratio formula is the revenue divided by the assets of the business.

Asset turnover ratio = Revenue / Assets

Revenue is found on the income statement of the business and is sometimes referred to as turnover or sales. Assets are found on the balance sheet of the business.

Generally, the higher the asset turnover ratio the more efficient the business is at generating revenue from its asset base.

As assets = debt (liabilities) + equity, the ratio also measures how efficient the business is at generating revenue from the total debt and equity funding used in the business.

## Asset Turnover Ratio Example

The income statement and balance sheet below are used as an example to show how to calculate the asset turnover ratio.

 Revenue 246 Cost of sales 145 Gross margin 101 Operating expenses 35 Depreciation 10 Operating income 56 Finance costs 8 Income before tax 48 Income tax expense 12 Net income 36
 Cash 40 Accounts receivable 30 Inventory 5 Current assets 75 Property, plant and equipment 130 Total assets 205 Accounts payable 25 Other liabilities 20 Current liabilities 45 Long-term debt 40 Total liabilities 85 Capital 20 Retained earnings 100 Total equity 120 Total liabilities and equity 205

The numbers used in the calculation of the asset turnover ratio are highlighted in the income statement and balance sheet shown. In the above example the revenue is 246 and the assets are 205.

Using the asset turnover ratio formula the calculation is as follows:

Asset turnover ratio = Revenue / Assets
Asset turnover ratio = 246 / 205
Asset turnover ratio = 1.2

In this case the ratio indicates that for each 1 invested in assets the business generates 1.2 in revenue.

## Real Life Asset Turnover Ratio Examples

The asset turnover ratio will vary from industry to industry, and therefore it is important when making comparisons to determine an industry asset turnover ratio based on financial statements of businesses similar to your own.

To illustrate the difference in the asset turnover ratio from industry to industry, the following table sets out the calculation of the ratio based on the Apple income statement. and balance sheet, and the Amazon income statement and balance sheet.

Asset turnover ratio comparison
Apple Amazon
Revenue 170,910 74,452
Assets 207,000 40,159
Asset turnover 0.83 1.85

Apple has a low asset turnover ratio and generates 0.83 in revenue for every 1 invested in assets, whereas Amazon has a higher asset turnover ratio and generates 1.85 for every 1 invested in assets. Generally, the lower the profit margin of the business the higher the asset turnover ratio.

The asset turnover ratio is reported on the ratios page of the financial projections template. The ratio should be monitored to ensure that it is consistent with the industry in which the business operates, and shows a value which is improving over time as the business becomes more efficient, and starts to grow revenue at a faster pace than its assets.

There is no correct value for the asset turnover ratio, care needs to be taken if the ratio becomes too high, as although it could indicate a very efficient business, it might indicate that the business is starting to over-trade; generating too much revenue with too little investment in assets.

### Note on averaging balance sheet amounts

This ratio includes an income statement amount (revenue) which is for a period of time (usually a year), and a balance sheet amount (assets) which is given at a particular point in time (usually the year end). To avoid distortion of the ratio, if there are significant changes in the balance sheet amount over the accounting period an average of the beginning and ending balance sheet amounts can be used.

Asset turnover ratio = Revenue / Assets
Asset turnover ratio = Revenue / (Beginning assets + Ending assets) / 2
Asset Turnover Ratio October 5th, 2016