Calculate the Total Asset Turnover

The total asset turnover ratio is a valuable tool that can help you determine how well you are using your assets. It is a simple ratio that can be calculated quickly if you have all of the relevant numbers in front of you. After you have calculated the total asset turnover, you can use it to make adjustments to how you use your assets and improve your earnings. Keep reading to learn more about how to calculate the total asset turnover.

Steps

Calculating the Total Asset Turnover

  1. Gather information. In order to calculate your total asset turnover, you will need to gather some information. If you do not already know your net sales and average total asset numbers, you will need to have the information available to determine your net sales as well as your average total assets. Use your business spreadsheets to help you determine these numbers.
  2. Determine the amount of net sales. To determine your net sales, you will need to subtract your total allowances and discounts for the year. For example, if you own a clothing store and you sold $200,000 worth of clothing the previous year but you had $10,000 in returns and gave $5,000 in discounts. Your net sales for the year would be $185,000.[1]
    • total sales – (returns + allowances) = net sales
  3. Determine the amount of average total assets. To determine your average total assets, you will need to go back two years in your bookkeeping. Find the amount of your total assets for the current year and previous year, then add the two numbers together. Next, divide the total amount by 2.[2] For example, if your total assets at the end of the previous year were $275,000 and your total assets at the end of the current year are $237,000, the total amount would be $512,000. When you divide $512,000 by 2, your total is $256,000. Therefore, $256,000 would be your average total asset number.
    • (total assets for previous year + total assets for current year) / 2
  4. Calculate the total asset turnover. Now that you have your net sales number and your average total asset number, you are ready to calculate your total asset turnover. To calculate your total asset turnover, you will need to divide your net sales number by your average total asset number. Use the total asset turnover ratio:
    • total asset turnover = net sales / average total assets[2]
    • Our hypothetical calculation would be: $185,000 / $256,000 = 0.72

Analyzing the Total Asset Turnover

  1. Understand the purpose of the total asset turnover ratio. The total asset turnover ratio is what a business uses to determine how much money is being generated by the assets a company owns. For example, if the total asset turnover ratio is 0.72, that means that the company is making $0.72 per year for every dollar of assets that the company owns.[2]
    • Higher total asset turnover numbers are better because they indicate that a company is generating more income for every dollar that the company owns in assets.
    • Low total asset turnover numbers indicate that a company is not using their assets in an efficient way or that there are production problems.[2]
  2. Compare the results to your competitors. Analyze your asset turnover by comparing it to other companies in the same industry and also to any previous asset-turnover figures you may have from earlier years. This will help you determine where you stand in terms of managing your assets.
    • A higher total asset turnover number is good, but if your asset turnover is high compared to other companies, it may indicate that you are using too few assets to generate sales.[3]
    • If you have a low asset turnover, it can be an indication that you have invested in too many assets for the sales you've generated.
  3. Use the findings to make improvements. The total asset turnover ratio should be used to determine how well you are using your assets and to begin to identify areas that could be improved. You should recalculate your total asset turnover every year to determine how the changes you made from the previous year are affecting your earnings.[4]


Tips

  • Since asset use varies by industry, make sure that you compare your total asset turnover number to other companies in your industry.[5]

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Sources and Citations

  1. ↑ http://www.cliffsnotes.com/more-subjects/accounting/accounting-principles-i/accounting-for-a-merchandising-company/net-sales
  2. ↑ 2.0 2.1 2.2 2.3 http://www.myaccountingcourse.com/financial-ratios/asset-turnover-ratio
  3. ↑ http://www.dummies.com/how-to/content/asset-turnover-ratios-and-quickbooks-2012.html
  4. ↑ http://www.investopedia.com/terms/a/assetturnover.asp
  5. ↑ http://www.myaccountingcourse.com/financial-ratios/asset-turnover-ratio

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