In practice, several indicators are used that reflect the effectiveness of enterprise asset management, and one is the asset turnover ratio. In simple terms, this indicator reflects the rate of return on resources invested in the assets of a commercial organization.
Turnover ratio characteristic
In English, this term sounds like Total Asset Turnover, and literally it translates as “total asset turnover”, which also allows you to get an idea of the value of this indicator. The asset turnover ratio is calculated as the ratio of the turnover of funds to the value of total assets in average annual terms.
Briefly, it shows the effectiveness of managing the company’s active resources and funds. But then what is the difference between the profitability ratio and the asset turnover ratio? A simple example – to characterize the level of business activity, it is the analysis of the turnover of assets that is used, and the profitability indicator evaluates the level of profitability by assets.
Scope of the indicator Total Asset Turnover
For a company that needs to assess asset management literacy, using the underlying formula for asset turnover helps determine whether current investment in assets is justified. The optimal value affects how large the cash flow of free funds is, and, as a result, increases the value of the company’s shares.
For investors, learning how to find asset turnover ratios isn’t going to do much good. The fact is that this indicator is not very informative, and therefore its separate use will not help to get a complete picture of how competently the company manages assets. Therefore, the scope of the current asset turnover ratio formula on the balance sheet is quite small:
- Comparison of companies in the same field of activity – the higher the asset turnover ratio of a company among competing enterprises, the more profitable it is to invest in its assets;
- Comparison of indicators of one company for different periods of time – this is used to analyze the dynamics of this coefficient. If the indicator is growing moderately, this also indicates that the company’s shares are attractive for investment.
The formula for calculating the asset turnover ratio and the standard value
So, the investor got acquainted with the term and studied why the analysis of the asset turnover ratio is necessary. How to calculate this value? For this, a single formula is used, where the coefficient is equal to sales revenue divided by the value of assets in average annual terms.
To obtain data on the asset turnover ratio, the balance sheet lines in the financial statements take into account the following – 2110, showing revenue, 1600, showing the value of assets at the beginning and end of the year. The final value obtained as a result of the calculation will show how many times the assets were turned over in a year. If the value is, for example, 3, then the company received three times more revenue for the year than the value of its assets.
How to understand that the asset turnover ratio is normal? A simple rule applies here: the higher the better, but we must not forget about the specifics of the activities of each company individually. Taking into account industry specifics and comparing indicators of competing enterprises will help to give a correct assessment of the effectiveness of asset management.