# Asset Turnover Ratio - Explained

What is an Asset Turnover Ratio?

# What is Asset Turnover Ratio?

Asset turnover ratio is an efficiency ratio that is used to measure the efficiency of a company in generating revenue through the use of its assets.

The Asset Turnover Ratio formula is:

Sales / Assets = Number of times

This ratio is used as a financial indicator which tells the efficiency of a company in the management of its assets. It is used to know the level of the assets' rotation to identify the shortcomings and then enact improvements to maximize the use of the company's resources. The rotation of the assets means how long the assets take to become cash. The Asset Turnover Ratio is calculated by taking the net turnover amount and then dividing it by the total assets. A high value of the ratio means that the productivity of the assets in generating sales is also high and so is the profitability of the business.

## How to Calculate the Asset Turnover Ratio?

Assume a certain company's assets in 2016 were 20,000,000 and the sales were 100,000,000. Calculate the Asset Turnover ratio. 100,000,000 / 20,000,000 = 5 In the above example, it means that the assets of the company rotated five times that year. Diving the number of days in a year by this number (365 / 5), we get 73 days as the time the assets take to rotate. The same procedure can be used to calculate the rotation of fixed and current assets. This is done to get more specific results since total assets give a very general one which is not very useful. It is essential to separately itemize items like inventories and portfolio because they are the most sensitive elements of the assets. Current assets usually are analyzed separately from non-current ones because they are designed to have a high turnover since they are assets solely dedicated for sale. This forces the search for the maximum possible rotation.

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