Generally, a higher asset turnover is considered better as it indicates that a company is efficiently using its assets to generate sales. A higher asset turnover means that a company can generate more revenue per dollar of assets, which can lead to higher profitability, cash flow, and return on investment.
However, it’s important to note that the ideal asset turnover ratio varies depending on the industry and the company’s business model. Some industries require a higher asset turnover ratio than others. For example, retail and manufacturing companies typically have higher asset turnover ratios compared to service-oriented companies.
A very high asset turnover ratio could also indicate that a company is relying heavily on its assets to generate sales, and may not be investing enough in the business for long-term growth. In contrast, a low asset turnover ratio could indicate that the company is not effectively using its assets to generate revenue, which could lead to lower profitability and cash flow.
Therefore, when analyzing a company’s asset turnover ratio, it’s important to consider the industry and the company’s business model, as well as its historical performance and trends over time. In summary, a higher asset turnover ratio is generally preferred, but what is considered a good ratio depends on the specific context of the company and its industry.