What is the Asset Turnover Ratio (ATR)?

The Asset Turnover Ratio (ATR) indicates how a company uses its assets to generate sales. A high asset turnover ratio means that the business uses its assets efficiently in making sales, whereas a low asset turnover ratio means underutilization of assets to generate sales.

Let us know more about the asset turnover ratio, how it is calculated, types of asset turnover ratio, and more in detail.

How to Calculate the Asset Turnover Ratio?

Below is the formula for calculating the Asset Turnover Ratio:

ATR = Net Sales / Average Total Assets

• Net Sales: Total revenue from sales minus returns, allowances, and discounts.
• Average Total Assets: Average total assets = (beginning assets + ending assets) ÷ 2

Asset Turnover Example

Suppose Company ABC has net sales of ₹1000 Crores and average total assets of ₹500 Crores. The ATR Ratio would be:

Asset Turnover Ratio = 1000 / 500 = 2.0

This indicates that for every rupee invested in assets, Company A generates ₹2 in sales.

How to Improve the Asset Turnover Ratio?

Companies can improve their asset turnover ratio in the following ways:

• Improving inventory management
• Selling assets
• Increasing revenue
• Leasing instead of buying assets
• Improving efficiency
• Accelerating the collection of accounts receivable
• Computerizing the inventory and order systems

Types of Asset Turnover Ratio

Two types of asset turnover ratios show how well a company turns assets into income. Both ratios are important for performance but vary by industry. An asset-heavy company focuses on fixed asset turnover for efficiency, whereas a service-based company focuses on total asset turnover.

Let us understand each type in detail:

Fixed Asset Turnover Ratio

The fixed asset turnover ratio shows how well a company manages its long-term assets, like equipment, land, plant, and machinery, to generate revenue. This is important for companies in the manufacturing sector.

A higher ratio indicates a company uses assets to generate revenue effectively, especially in asset-heavy industries.

A lower ratio indicates a company underutilizing assets or overspending on equipment with poor returns.

Fixed Asset Turnover Ratio = Net Sales / Average Fixed Assets

Total Asset Turnover Ratio

Offering a broader view of a company’s overall efficiency, the total asset turnover ratio considers both fixed and current assets.

This ratio can be used to check how optimally a company utilizes its assets to generate sales.

A high ratio indicates optimal utilization of assets.
A low ratio shows underutilization of assets.

Total Asset Turnover Ratio = Net Sales / Average Total Assets

Limitations of the Asset Turnover Ratio

Here are a few limitations of the asset turnover ratio:

• Doesn’t show profits
  The ratio only shows how efficiently a company uses its assets to make sales. It doesn’t provide insights into profit margins. A high turnover percentage does not guarantee great profitability.
• Ignores asset condition
  The ratio does not consider how new or old the assets are. If the assets are old and fully written off, the ratio might look better than actual.
• Can vary due to accounting policies
  Companies use different practices to calculate things like depreciation. This can change the ratio, which makes comparison between companies difficult.

Difference between the Asset Turnover Ratio and the Fixed Asset Ratio

Conclusion

The asset turnover ratio helps investors understand how efficiently a company is managing its assets to generate revenue. It is advised that investors must consider all other financial metrics along with the asset turnover ratio to make investment decisions. To invest, you can use the BlinkX App with zero brokerage fees and trade.