What Is the Total Asset Turnover Ratio and How Is It Calculated?

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The total asset turnover ratio measures the ability of a company to use its assets to efficiently generate sales. A company with a high total asset turnover ratio is considered efficient in making money using its assets.

The ratio considers all assets, current and fixed. Fixed assets include property and equipment. Examples of current assets include inventory and accounts receivable.

How to Calculate the Total Asset Turnover Ratio

The equation to calculate a company's total asset turnover ratio is:

Net Sales/Total Assets = # Times

To interpret this, note that the lower the total asset turnover ratio (the lower the # Times), as compared to historical data for the firm and industry data, the more sluggish the firm's sales.

A low number, such as from sluggish sales, may indicate a problem with one or more of the asset categories composing total assets — inventory, receivables or fixed assets. The small business owner should analyze the various asset classes to determine in which current or fixed asset the problem lies. The problem could be in more than one area of current or fixed assets.

Interpreting Your Results

Since current assets also include the liquidity ratios, such as the current and quick ratios, a problem with the total asset turnover ratio could also be traced back to these ratios.

Many business problems can be traced back to inventory but certainly not all. The firm could be holding obsolete inventory and not selling inventory fast enough.

With regard to accounts receivable, the firm's collection period could be too long and credit accounts may be on the books too long. Fixed assets, such as property or equipment, could be sitting idle instead of being used to their full capacity. All of these issues could lower the total asset turnover ratio.

When comparing the total asset turnover ratio for one company to another, you need to make sure you're comparing apples to apples — only use companies that are in the same industry, or your results won't be valid. For example, you can't compare the ratio for a company in the retail clothing industry to one in the automobile industry.

Total Asset Turnover Ratio: Good and Bad

What if the total asset turnover is excellent as compared to historical data for the firm and to industry data? That means your firm is utilizing all its assets (its asset base) efficiently to generate sales and that is a very good thing.

But on the other hand, what if your total asset turnover ratio doesn't stand up to that of other companies in your sector? You might want to consider delaying the purchase of equipment or facilities, limit purchases of inventory to only what is immediately needed, consider consolidating or closing underutilized facilities or stores, or make more efficient use of your sales force.

Ultimately, total asset turnover ratio is a good barometer for the health of your business. Used wisely, it can help to fine-tune your activities and generate more profit.